BECAUSE of insecurity, people in general are buying way too many insurance policies and products these days, some of which may actually not be of much benefit to them.
“Many do not understand the plans they buy into, and many buy the wrong type of insurance such as investment-linked ones, ” Robert Foo, CEO of MyFP Services Sdn Bhd told StarBiz.
“One should never buy insurance for a return because insurance is meant for protection, not returns, ” Foo said.
As a fee-only financial planner, Foo notes that the company does not collect side commissions by selling other financial products.
“I have a client who spends RM40,000 per year on insurance premiums.
“This is a big amount of money. Many have been confused and what is worse is that even when they are confused, they think that they have made a right decision, ” Foo said.
“They can barely afford it, and it is affecting their cash flow situation.
“We have another client who pays more than RM100,000 per year on insurance premiums. Some of them do not realise they are doing the wrong thing, ” he added.
Foo says the situation is compounded by the insecurity that people commonly have these days.
“It’s time to come back to reality. A lot of people talk to them, a lot of agents scare them and they become so scared that they end up buying this policy, and another policy, and another one.
“All these adds up to excessive insurance premiums, ” he said.
Eng Meei Yu, co-founder at MyFP Services says that one should first consider their cash flow position before buying an insurance plan.
“They have to ask themselves, do they really need that insurance plan. If they really need to buy (a plan), I would just recommend buying a pure protection plan: term life that covers permanent disability or if the breadwinner gets a premature death, ” Eng said.
“This is to ensure one’s dependents can have a certain amount of money to live on.
“But having said that, I don’t believe in insuring RM3mil for these purposes.
“Nobody can really afford this in reality. They would end up struggling with their cash flow; it becomes meaningless, ” she added.
Eng says that one should consider perhaps covering up to certain number of years in their forecasted expenses in the event of a tragedy.
“Medical insurance is good, but many people who are working in the bigger companies have their employers covering their medical expenses.
“If one is worried about post-retirement, then one should consider if they can really afford it, ” Eng said.
She added that credit should be given to the government hospitals that offer basic medical coverage to the population at large.
“Some people are very down to earth.
“They acknowledge that if it is really needed, they will go to the government hospital.
“People usually forget this, one doesn’t really have to rush in but plan it out, ” Eng said.
“If needed, a critical illness rider, or an early critical illness rider, can help to provide a certain amount of cash flow that is needed during medical emergencies, ” she added.
Eng says that it is not financially savvy to purchase endowment plans or investment-linked plans that mature, usually, after 20 years.
“To us, this is really a joke.
“An investment plan is like oil mixing with water.
“Another example is the education plan. Many agents tell young parents to buy when the child is young as it is cheaper, ” she said.
“But a common thing that many forget about is that in insurance, the largest lump sum paid is when the insured passes away.
“So in the education insurance context, no sane parents would wish death on the child.
“So if the child really passes away, you get a big lump sum, who is going to use the education money after that?
“They are just buying the wrong thing, ” Eng added.
She also noted that the maturity value for an education insurance plan is usually very low.
One would barely be able to pay for one term of university fees.
“It’s a totally wrong product.
“Some people may think of the tax relief part but over the long run, it is be even more expensive for them because they have bought the wrong financial product, ” Eng said.
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