20 March 2012

How to do Home Work Before Buying an Insurance or Saving Production: Common Mistakes & 5 Important Considerations

Firstly, after a very impressive / attractive introduction / explanation about a particular (limited) saving or protection or insurance plan from your (closed) friend or relative, all we should do is to require a sample contract for further study before making any decision.

Common Mistakes
Yes, the agent is your trusted (closed) friend / relative and you should unconditionally support him or her. But please think twice, an insurance plan is a whole life planning, and it deserves your full attention. And you should only support them by buying a suitable product for yourself or your family. Whole life plan means you are required to pay the premium annually until the termination/maturity date of a particular plan. Any early termination of any agreement / contract can cause pain in your financial status. Therefore, we should spend enough time in this kind of whole life (or long term) plan product.

Yes, you will be given 15 days 'Cooling Off Period' to cancel the agreement/contract, but having a comprehensive study before signing up a product or purchase can undeniable help you avoid many unnecessary problems.

Next, after having a sample contract of a particular insurance product and understand some common mistakes, now, we can do our home work as follows:

Five Important Considerations

1. Guarantee?
For saving plan, all potential buyers should find out whether those attractive returns are guarantee or simply historical achievement. And we should understand that future is still unpredictable. Previous attractive return cannot guarantee future return. If it can, why doesn’t the company guarantee it in the agreement / contract, such as at least XX% annual return?

2. Inclusion Vs Exclusion
Please check and understand those exclusions of a particular contraction. Please remember that all insurance companies already assess those potential risks and exclude high risk protection to safeguard their interest. If you want to protect those high risk protections, higher premium is required.

Some insurance products have relatively lower fee compared the other with same sum insured, it is possible because the former excludes lots of high risk protection.

3. Automatic Premium Loan / Non-forfeiture Provision
Please be very careful about those pay certain period then do not need to pay until maturity date product. Please find whether this 'plan' is written in the contract / agreement or not.

Yes, you can just pay for certain period then do not need to pay. This is because APL (Automatic Premium Loan) is provided in your plan. That is, the company LOANs you money to pay off the premium annually with interest (normally, the interest is quite high and adjustable). In other words, even though the plan may have quite no bad return, after offset by the automatic LOAN, you might simply get nothing from the plan but an insurance protection during the period.

4. Liquidity & Cost of Opportunity
Can you affordable to that premium annually until the maturity date?
What happens if you lost job for one year due to economy crisis?
What happens if a great opportunity is available after three years from now and requires lots of cash? Do you have extra saving in your bank in terms of fixed deposit?

5. IRR - Internal Rate of Return
Please do IRR calculation to find out effective return interest. There is no such a thing called package!! All investments must have their own IRR. People who tell you this particular product is in package and does not have IRR only indicate their limited knowledge and unprofessional attitude.

Lastly, personally, I do discourage people to buy saving plan because it will cause serious liquidity problems and it does not provide enough return to overcome inflation. But please have a fundamental insurance protection in terms of Accidence, Medical Card and Life Insurance. All of them only cause you few hundred per years to offset those potential risk in your life. Remember, insurance is a good tool to offset many potential risks in our life. For investment or saving, I do encourage you to spend some time to do home work and buy some good companies' share with discounted price and grow your wealth with the company from year to year. That's all today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia


1 comment:

Buy Income Protection said...

Finding the most suitable insurance plan that fits your needs and budget isn't always easy, but it is certainly worth doing some research before committing to anything. This will help you weed out the good guys from the bad guys.

Chris from buyincomeprotection.co.za

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