If you were asked to key in your life insurance premiums into a budget worksheet, how would you classify it – as an expense, saving or investment?
If your insurance plan has a cash value, you might treat it as savings.
If your insurance plan buys units in a unit trust, you might treat it as an investment.
We might not even consider that insurance is an expense because that would mean that we’re paying for a product we cannot see, we hope never to use, and will never recover the cost if nothing happens to us.
Instead, we would probably be more inclined to hear how insurance can make us wealthier. It’s just the way we are wired and that is how the industry has reinvented itself to be more marketable.
According to Life Insurance Association Singapore (LIA), 48% of new insurance sales in Q1 2020 went to products with cash values while investment-linked policies made up another 20%1. These policies are appealing because they offer the potential for cash accumulation by investing majority of your premiums in the insurer’s participating fund or in unit trusts.
At MoneyOwl, we believe that insurance is for protection, and accumulating wealth if at all is a secondary purpose for insurance.
Just like how we would usually not drink bubble tea with cheese toppings to satisfy our cheese cravings, an insurance policy is never the most cost-effective way to grow your money.
Insurance is primarily designed to protect you and the ones you care about from unfortunate events that affect your ability to work. Don’t forgo the main benefit of buying insurance just because you are concerned about not getting any money back.
When we combine our goals for wealth accumulation and protection, we end up spending more on insurance, and as a result settle for less coverage than the amount we need. It is like buying an umbrella that isn’t big enough to cover you when it rains because you paid a lot more for the option to get your money back if you never got to use the umbrella. This kind of defeats the purpose isn’t it?
It’s time to wise up and buy insurance the right way. Find out how you can get maximum protection at the lowest cost today!
This is a MoneyOwl exclusive series. Read the rest of the insurance principles:
This article is written by MoneyOwl’s Solutions Team.