Why Insurers Leave You Underinsured
By Seth Wee (guest contributor)
Imagine having a doctor who purposefully does not treat you completely such that you would constantly remain sick, thus having to visit the doctor repeatedly, each time paying for his services and medication. I am not familiar with the medical fraternity in Singapore and I trust that most doctors do their jobs ethically, but I know that the local financial industry thrives on this unethical practice.
A sad story of an underinsured client
I recently met a client who bought an investment-linked policy recommended to her by her friend. It provided poor coverage and was also taxing on her monthly budget. What is sad was what the agent wrote in the point-of-sale documents to justify the sale of the policy – an ostensibly apologetic “client to increase coverage when financially better”. It shows that the agent was fully aware that such a policy underinsures her client and yet deemed it fit to recommend her friend the policy. It is particularly upsetting since the client had specifically indicated her concern was insurance coverage with her limited budget.
Selling costly and unsuitable products is very lucrative. The commission, bonuses, and incentive trips are attractive. But the side effect of their clients being underinsured and having to purchase insurance again makes it even sweeter for sales – it creates opportunities for repeat business. Herein lies the incentive for agents to continue giving bad advice.
The agents are not concerned if something happens to you while being underinsured, nor the fact that your insurability likely decreases with age. They do not care that your financial obligations will increase in the near future when you buy a home or start a family, which leaves you with little budget to afford their expensive policies. They do not bother with that fact that selling you that policy takes up your excess budget, while preventing you from being adequately insured with better solutions like the client I have just mentioned.
All they have to do is to write a few lines of justifications in the point-of-sale document as if it is perfectly reasonable to leave you underinsured. Each year, they will have yet another excuse to get you to “top-up” on your perpetually inadequate insurance coverage.
There are solutions
The truth is that there is an appropriate insurance strategy that can address each person’s insurance needs properly. I have a client with a special needs sibling who is dependent on him. I calculated a need for $600,000 in death coverage for him and solved it within his budget.
Another client had a newborn and he thought that he should get a small amount of life coverage because he thought it was “expensive”. I calculated the shortfall he required and got him decreasing coverage of $500,000 at a premium rate, which I think is cheaper than what most people pay for phone bills nowadays.
Many tied agents cannot even access most of the better solutions. But that is no excuse, as they can always do what I did, and leave their agencies. However, who would want to give up thousands of dollars in recurring income to earn a pittance selling ethical solutions? Those who do join financial advisory firms do so because they can now recommend products that give more attractive commissions.
By guest contributor Seth Wee, an Independent Financial Adviser representative who blogs at Seth’s Blog on Finance. Posted via www.MoneyMatters.sg, your guide on how to make more money, save smarter, invest intelligently, and enjoy your money like a pro. Click here to get our free report on what you must know about financial freedom.
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