Most of us would have purchased some insurance policies by now. If you haven’t, you need to start looking!

Basic healthcare insurance in Singapore is relatively inexpensive and can even be paid with CPF money, but some of us may end up buying endowment or investment-linked policies as insurance agents would put it — to “beat inflation”.

Well, it’s not all that bad to start saving up early, but the fact is most people do not really understand what they are buying into, myself included. Insurance policies are extremely complicated and every company and policy is different.

However there’s some things that I’d like to caution you about.

Endowment maturity and break-even

Endowment policies typically have a maturity date that is relatively long, e.g. 15 years. The break even point is usually quite far ahead, say at the 12th year.

Consider this: A person purchased an endowment policy with a premium of $100 per month. If he loses his job before the break-even point and fails to pay up his monthly premium, he would be at a financial loss. To break-even, he/she would have to pay up at least $100 x 12 x 12 = $14,400 before realizing any form of financial gains without even factoring inflation.

It is OK to buy some of such products, especially if the interests are guaranteed, but do consider the long payment tenure. One should set aside funds to keep the policy rolling. Don’t ever let a policy lapse!

Investment-linked policies

Investment-linked insurance policies are no different. Every dollar placed into investment-linked insurance policies have an overhead of around 5-10%. This is used for a basic life insurance coverage and of course your agent’s commission! That’s how they earn your money!

Besides the risks that investments carry, the overheads would mean that every dollar you “invest” on a monthly basis would take at least 1-2 years to see any gains assuming the investments return 3-5%. And if you are making monthly payments this is taking 5% from you every month, effectively rolling your break-even point forward!

In addition, the management of these fund baskets aren’t exactly transparent. I never knew what exactly was invested and it changes over time. Every year they send me a thick booklet with all the funds and fanciful charts, but who the hell reads that stuff?

Switching funds

If you already have investment-linked policies meant to hedge against inflation, right now the best bet is probably to switch to bond funds as interest rates have been historically low. Buy into a bond fund that has less probability of default, e.g. Singapore.

Why do I recommend bonds? Because bonds are secured, less volatile than equity, and to buy a bond requires typically in excess of $50,000 so I see it as a form of positive leverage.

The non-savvy investor

In my opinion, endowment and investment-linked insurance policies are for the uninformed or non-savvy investors looking for an easy way out. After all, insurance companies are a business; they need to make money.

I would actually consider outstanding endowment payments to the date of maturity as a debt! If you have read my article on net worth, this means lower or even negative net worth!

For most of us, some basic healthcare and life insurance coverage is enough.

Know and manage what you invest

Many people think that these insurance-linked investments are long term “invest-and-forget”. After putting my hard earned money into these products, I can only say with a great amount of certainty that every investment requires time and attention and that never let somebody else manage your money for you.

Explore stocks, start a business, or just save up

Spend some time to understand stock/equity trading and the returns may potentially be higher. In addition, you will have control of what you want to invest in, and you will also learn from it especially when it comes to human behavior. Somethings in life you really need to put money into before learning 😉

Otherwise, start a business or just save the money. Sometimes your time is more worthwhile than staring at stock counters all day long.

So if an agent comes up to you again to tell you that you need to beat inflation, beat the agent instead. 😉

P.S. Sorry, Loy if you are reading this! This is like an article out of “Hard Truths”, but being a naive investor I do not blame anyone. You have been a good agent!