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Unnecessary Insurance

>> Friday, September 16, 2011

Risk management is the basis of insurance. Fear of the uncertain future creates the need for financial protection against a catastrophe. However, I recently stumbled on an article that provides reasons why some insurance are unnecessary. I kind of agree on the some of the points made:

1. Mortgage Insurance
Instead of focusing on just paying off the mortgage, wholistic coverage should be considered. In addition, most companys provide large sum discounts. There are term plans that mirror the mortgage insurance coverage, providing reducing coverage without needing you to submit mortgage documents and revising everything when you change residence.

2. Comprehensive Motor Insurance
Most drivers opt for low excess and a comprehensive plan instead of third party plan with higher excess. With the raising cost of motor insurance premiums, it is to your benefit to do some calculation if it is worth paying both an arm and a leg for the maximum coverage. When considering excess, consider the amount you are comfortable to fork out, keeping in mind that once a claim is submitted, your premiums will sky rocket the following year. For example, if you chose $500 excess and a claim for $1000 is submitted, your next premium may be $1500 more and may lose your No Claim Discount (NCD), so does it make sense to claim or pay yourself? In that case, why not adjust your excess higher and pay less premium.

3. Child Insurance
Insurance is mainly designed as a safety net for your dependents. As children do not have dependents to worry about and are, technically speaking, a "liability", the main concern is saving for their future exponentially increasing living expenses. Most important of course is to have an adequate hospitalisation expense plan in place and to review the parents coverage with the addition of this new dependent first.

4. Credit Card Insurance
Purchasing coverage to pay the bill in the event you cannot, is purely an additional expense that could have gone to paying down the bill in the first place. You will save on the premiums as well as the debt interest. Do not even have the debt by paying off your bills on time will be the most prudent approach.

5. Critical Illness Insurance
Instead of trying to cover all the possible illnesses in the world and possibly new illness not even known yet, a comprehensive hospitalisation plan for treatment cost and disability income insurance as income replacement should be emphasized first. Further, nowadays, early stage plans are also gaining popularity, the premiums can be quite significant, so are they indeed worth it?

When choosing Insurance, there are so many policies to chose from, and they all cost money. No point wasting good money on less critical additions when the fundamental basics are not adequately addressed. Are you aware of all the available policies or are you relying on your insurance salesman to recommend you only those high commission products?

6 comments:

Patrick See September 16, 2011 at 1:23 PM  

I am pleased to note that some actually focus on risk management.

As financial planners, we listen to our clients and provide a summary of risk management.

It is entirely their decision if each risk is a financial impact.

Correct me? As financial doctors, we should not advise or opinion if insurance is un necessary.

Lau September 17, 2011 at 8:28 AM  

Patrick,

I would beg to differ.

As a financial doctor, it is also important to educate the client as subject matter expert.

Finally it is the decision of the client, no doubt, but advice should be still be given.

It is fine to provide a professional opinion if certain insurance is unnecessary. Clients can always seek a second opinion.

Medical doctors also advice if certain surgery or drug is ineffective. And give advice and opinions on alternative solutions. This differentiates their standard.

financialray September 17, 2011 at 1:55 PM  

Agree with Lau.

Actually what differentiates the 2 professions is that while trust is most of the time given to a medical professional with high standards of moral and ethics currently upheld, the same cannot be said of a financial "doctor" when many have conflicts of interest.
That has now caused many financial advisers to switch to fee based rather than product based to remove this conflict of interest.
WHile most of the financial advisers are still trying to prove they can uphold a high standard, it is nevertheless still important for the individual to at least get some form of financial education, or advice from a friend or relative who is more financially savvy. After all, everyone of us may only get ONE chance to plan our entire financial life.

Lau September 19, 2011 at 1:42 PM  

By not presenting every single type of insurance for client to decide, the advisor is indirectly deciding that the insurance not mentioned is unnecessary.

For example. Only selling ilp and not sharing whole life, limited pay, term, mortgage, hospitalization, disability income, etc.

Calvin Yeo September 19, 2011 at 4:38 PM  

Lau,

I agree with you that all these are unncessary insurance. A savings plan is not a good alternative for a proper investment plan in equities,bonds etc. as the charges are high and the yield is often very low.

I believe the real insurance everybody needs is a good term insurance which covers your basic net worth and liabilities so you family would not have to suffer if you are no longer around.

I wrote about this in my post
http://www.investinpassiveincome.com/book-review-get-value-from-your-life-insurance-by-mr-tan-kin-lian/

Rgds,
Calvin
http://www.investinpassiveincome.com

Lau September 20, 2011 at 2:57 PM  

Calvin,

Coincidentally, I just wrote a review of yr review.
*smiles*

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