Sunday, August 31, 2014

If something is 10% Insurance and 90% Investment, why do we call it Insurance?

Say "Insurance" one more time. I dare you. I double dare you.

You know what I don't understand? Why do people misrepresent investments as "insurance"? Many people now unknowingly refer to an investment as insurance because of all the butchering of the meaning that has been going around. This has to stop.

Let's be crystal clear about this people: Insurance is NOT an investment.

What is insurance and what is an investment? Let's use Investopedia's definition for it:

Some good and pure forms of insurance that have not had their meanings butchered and masqueraded as "investments" are: Travel insurance, Car insurance and Fire insurance.

Have you ever heard anyone in your life tell you that, last week they met their insurance agent and "invested" in some travel insurance? No right. The word to be correctly used with insurance is "protection". You protect yourself using insurance. You invest using investments. You can't "invest" in insurance.

So why are there so many "insurances" that you can invest in? Well, because they aren't really insurance. Not mostly, anyway. They are investments that are cross-dressed and sprinkled with some insurance so that they can be legitimately referred to as insurance, so you feel better at night sleeping with a potentially dangerous beast.

The problem isn't really with those kind of insurances, nor is it with investments. Like I said, no one goes around saying that they have "invested" in car and fire insurance. Likewise, no one goes around saying they have "insured" themselves by buying some stocks or bonds. The problem comes when there is this grey-area of Investment-Linked Policies and endowment insurances.

Investment-Linked Insurance Policies (ILPs), going by MoneySense's definition is:

So, the line in red is what I would like to draw your attention to.
"... if you are more concerned about getting life insurance... you may need to consider other life insurance products."
Too many people tout ILPs as insurance, which also just so happens to have investments returns. This is intentional misrepresentation because people generally have the notion that anything that is called insurance is "safe" while anything that is called investment is "risky". By referring to ILPs as insurance, it creates this false sense of security that ILPs are low risk products. Hence, people want to invest in this "insurance".

ILPs are more investment than insurance. If an ILP is 10% insurance and 90% investment, what should you call it? Well apparently, if you are in Singapore, you call it insurance. If something is 10% not-bullshit and 90% bullshit, what should you call it? I say bullshit.

Let's be real about what ILPs really are. ILPs are expensive investment tools which just so happens to have an insurance portion to it. You don't invest in this "insurance". You are investing in an expensive investment vehicle (the high costs eats into investment returns) that has an insurance portion to it. It's like the free soup that comes with your chicken rice. No one buys the chicken rice for the soup.

If ILPs are going to be seen, talked and touted as mainly insurance that just happen to be investment-linked, then maybe we should all go to hawker centres and order chicken broth soup that just happens to come with a plate of chicken rice. Where's the logic, please help me.

Now, let me talk about Endowment Insurance. I do not like the title of it at all, not one bit. Even though the MoneySense definition of it recognizes that it is more investment than insurance, they still call it endowment insurance. I find it very misleading.

Once again, they admit that a fraction of the premium paid will go towards insurance protection, while the remainder is invested. Also, if you have enough insurance, they say that you shouldn't be getting this product, because it is just an expensive way to invest! ("you could be paying for something that you don't really need" refers to the insurance portion of the endowment plan)

So, why is MoneySense classifying expensive investment products with a small insurance feature as insurance? Do they really think that these products which are mostly investments should be called insurance?

What is strange is that none of the insurers are unclear about this distinction of what is an investment and what is an insurance. All their ILPs and Endowments are clearly listed under "Savings & Investments", NOT under "Protection". Same for the banks. They all call it "Savings with Insurance".

Don't get me wrong. All these products have their uses. I just think that if something is mostly investments, we ought to call it an investment, rather than insurance. Or at the very least, an investment with some insurance. But definitely not only insurance.

/rant off


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