Life is uncertain. We cannot say with certainty what will happen to us tomorrow. No one can ever predict the future.
Yet, there is one certainty in life. It is called “Death”. As Steve Jobs states in his 2005 Stanford Commencement address:
No one wants to die, even people who want to go heaven don’t want to die to get there. And yet death is the destination we all share. No one has ever escaped it.
Death is certain. Like it or not, we all have to face it. It is just a matter of when. The least we can do is to be prepared. We need to ensure that our children, spouse and other dependents are well taken care of after we leave this world. As such, insurance come into play to protect against this catastrophic event.
Is Insurance an Expense?
The traditional understanding is that insurance is an expense. We should always avoid unecessary expenses. Hence we should watch and be cautious about buying too much insurance.
On the other hand, this does not mean that we should not buy insurance at all. In fact, everyone of us should at least buy a policy that covers death, because we will always get to claim the sum assured.
The big question is – Why not just save the money in the bank and in the event of death, my beneficiary can withdraw the lump sum cash from my savings. Will it be more than what I can get as compared to buying an insurance policy? There are two reasons why savings will not work as well. Here is the analysis:
First, you should not treat your savings as your protection. This is because death is unpredictable and you have no certainty to save to a lump sum before you leave this world. Insurance on the other hand, will lock in a lump sum for your beneficiary the moment you purchase it. Even if the insurance policy is only in place for a few years, you will still get back the entire sum assured.
Secondly, you will get back what you have paid for the policy plus a very decent yield. Insurance then becomes a good form of savings for your dependents, rather than an expense.
Returns up to 4.71%
In some cases, you might even get returns of up to 4.71%. Here is the example that I generated for Tokio Marine Term Insurance.
- Age of life assured: 29
- Sex: Male non-smoker
- Occupation: Class A
- Sum assured: $300,000
The premium he needs to pay is $1110 per year. Based on the Singapore white paper in 2013, the life span for an average male is about 80 years old. I assume in this case that he will live until age 85. At time of death, he will get back $300,000 death benefit from the insurance company.
The total premium he has paid is only $62,160. Using the internal rate of return calculation, the returns for premium paid is 4.71% per year. Note that this is the ‘returns’ for a term insurance with no investment component!
So since the return is so good, should I buy more insurance? Well, there is one little catch. The Tokio Marine term insurance policy will only cover until age 99. In the event that you live beyond 99, you will not get anything back from the policy. (Is that a happy or sad event, I wonder)
You also need to take note that the return is very dependent on the age you enter into the policy. For a person that enters into the term protection at age 49, the return works out to be 3.02%. This is why it is always encouraged to buy insurance as early as possible.
Conclusion
I hope you will realise that insurance is not an expense. We are all at risk and we must always have sufficient protection. Always ensure that you have sufficient protection before thinking about investing and growing your wealth.
As I have shown, insurance is also a very good form of savings for your dependents. The ‘returns’ can exceed that of traditional savings and other low risk investments.
In my next post we will be talking about Life insurance vs Term Insurance – what are the pros and cons. Look out for it!
I have another perspective. Insurance is an expense. You are buying peace of mind. It is to hedge against catastrophic risks.
Does Bill Gates need to buy insurance?
=> whenever possible, you should self-insure
Does a 99-year old man need insurance?
=> yes if he’s a stud and just fathered children in his 80s / 90s. otherwise what are his adult children doing that they still need his $300k insurance payout?
Does a single person with no dependants need insurance?
=> he may need hospitalisation, motor, accident, fire insurance, but not term and life.
From my more than a decade of experience reviewing clients’ insurance portfolio. I know most people who buy term will never hold it till the end of the term. That is just human nature.
Insurers also know this, that is why they always make money selling term insurance coz majority of the policies will never be claimed.