Continuing from my previous blog entry about the Buy Term, Invest the Rest (Access Part 1 and Part 2 here) approach, I realized that many people, my friends included, do not know too much about insurance and what happens to their money. “I don’t know” is a very normal response I receive whenever I ask my friends how much their coverage they have for insurance. Many of them trust that their money is held in safe hands by their insurance agent, and to be frank, I was one of them until I decided to get insurance for myself and did some research. The numbers that the agents provide them are sufficient enough for them to accept the returns so long as they look more promising than the initial capital the long term.
If you did read the blog post that I did on BTIR though, you should be aware by now that the projected returns of the non-guaranteed part is not exactly 3% to 5% (depending on what is stated) if you do the actual calculations. There are too many additional costs that would be factored into your profits, eventually leaving you with a huge deficit should you use your money for other DIY investment options.
I know that there are definitely also people whom do not trust themselves to be able to invest, or are too lazy to do so. And that’s okay. But you have to know that it is precisely of this reason that the agents can utilize to their advantage. By offering to manage your finances for you if you don’t want to and “promising” you better returns for doing nothing, their service comes with a cost. And like you would expect, this is not explicitly shown to you.
Personally, I have met up with a few insurance agents and it is disappointing to note that they do not know the exact break down of the plans that their companies offer. However, I do not believe that every insurance agent is like that. Sometimes, some probing may help you to understand how much your agent really knows and if your money would be safe with him/her (or the company they are representing, at least) should you choose to take up any plan which premiums would be used for investing.
Here are 3 questions that you can ask your agent before committing to getting an insurance plan:
1) What kind of investments will the premiums be used for?
If I am not wrong, most of the insurance companies should have a list of mutual funds that they pool money into and allow a group of fund managers to manage it. Your premiums would be used in these mutual funds via dollar-cost averaging methods or a lump-sum deposit. Ask your agent where your money will go to. You can also request for a performance history of the mutual funds. Knowing how the mutual funds have progressed in the past may indicate the track record of the fund manager and if it has achieved its targets.
Likewise, you may also request for a record of the transactions if you already have an ongoing insurance plan. I highly recommend that you do this because you would know the cash flow of your premium and how much of it goes into other costs. Your plan may even offer an option for you to allocated your own funds, so you can update your agent should you choose to have more control over your premiums.
2) What insurance plans do you have personally?
Most of the time, your agent would first ask you what are your financial goals and what you want to achieve eventually. Then, it would be their job as an adviser to provide you solutions to your goals and needs. If you have not thought about the direction you want to go, you can ask your agent what kind of plans they have themselves. If the plan that they have recommended you is a plan that they have also taken up themselves, it means that they believe in what they are selling and it is working for them. If their financial goals should seem to be aligned to yours, all the more convincing it would be!
3) Can you provide me with a break down of the costs involved?
This is a critical question because the agent might be less explicit about any possible hidden costs. They may not be too upfront about the amount of commission that they make, and I’m actually not so sure if they are allowed to share such information with their clients. However, even if this is not possible, ask for the break down still because their commission is only part of the cost (although it does amount to something significant eventually). Other distribution costs, especially management fees for the mutual fund manager, and transaction fees all come into play as they eat into your final profits. Check if the net return amounts to a value that is acceptable for you in the long run.
That’s it! Just three questions, and you would know if your agent knows his/her stuff. I’ve tried it before and it really shows how experienced the agent is and if they really care about reaching your financial goals with you. Working hand in hand with them and establishing a good relationship could provide a win-win solution to both parties. If you do find anything amiss, just politely back away and look for someone else that would suit your needs better.
Remember to do some reading on your part too before meeting your agent. Make sure you are clear on what you want on your end. The Internet is here to help you to make an informed decision, and knowledge is power if used properly. If you are using this blog entry as a start, I would like you thank you in advance and I hope that you get the right kind of protection for yourself/family. 🙂
Thanks for reading!
Miss Niao xoxo