In my previous article, I expounded on why one shouldn’t purchase a long-term savings plan. If the list isn’t compelling enough, here are a couple more reasons why it’s a bad idea to commit to decades-long insurance savings plans, and what you can do if you have purchased one.
No incentive for agent to provide continuing service
As mentioned in my previous article, such plans come with high upfront commissions which eats up the time-value of your savings. A disgruntled Hayley tried to correct me by saying that the customer is paying “distribution costs” and not commissions, which I find really disingenuous. What makes up the overwhelming bulk of these distribution costs? Commissions.
And commissions incentivise people to behave one way or another. Need I spell the obvious? By its very nature, commissions are meant to incentivise people to sell, sell, sell. Upfront commissions exacerbates this problem.
When you purchase a savings plan, your agent is rewarded lucratively in the first and second years, and thereafter you are really depending on his/her goodwill to provide ongoing service. What are you going to do otherwise, lapse the policy and suffer losses?
Upfront commissions will always incentivise your agent to seek new customers, regardless of how well-meaning he/she is and sincere in providing you after-sales service, or perhaps look for you to provide “periodic reviews” – an excuse to sell you more policies. Unless you are a constant source of new business for them by always purchasing new policies, you’d eventually be lost in the sea of customers he/she have to endlessly acquire to keep up a livelihood.
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No alignment of interests
Over the next decade or two, it doesn’t really matter how well or poorly the savings plan performs because your agent has been paid and has enjoyed their incentive trips.
Not only is there no financial incentive to provide you with after-sales service, there is no link between his/her remuneration and how well your savings perform.
This is in contrast to a variety of investment options you can undertake where remuneration is linked to performance, ensuring that your adviser has an incentive to ensure that you are more financially well off on top of just providing you with ongoing service.
I’ll talk more about such alternatives in future, so subscribe to my Telegram channel to be notified of such articles.
What you can do if you have such policies
If you have very recently purchased such a policy, consider exercising your freelook period. You have up to 14 days to get a refund on a policy, starting from the day you receive the policy document, although I believe some insurers would allow a slightly longer timeframe for you to have a change of heart.
Sunk costs are sunk costs
If your policy is around a year old, I might even consider lapsing the policy. You’d suffer losses, yes, but such losses are already incurred (ie, sunk costs) regardless if you continue or not because they have been used to pay off distribution costs that becomes… no prizes for guessing – commissions. If you continued the policy, you are counting on its returns to cover the distribution costs you’ve incurred, and such returns can be derived from other products.
Just go along with it
If you have paid for two or more years of premiums, most of the distribution costs have already been incurred, so there is little difference what you choose from here. If you continue, you are stuck with a policy that is arguably too conservative for your risk profile and the time horizon. The upfront costs have largely been incurred, so it also doesn’t make much sense to terminate it after enduring such high costs.
Take it as a low-risk plan for forced savings, and make more prudent investing decisions
The usual disclaimer applies: seek advice from a financial adviser on your specific situation and policy before making a decision.
Just speak to someone who didn’t recommend you the savings plan to begin with, and make sure they are advisers and not just commission-based salespeople.
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