So I have this friend who only drinks Starbucks coffee. And I’m not talking about cuppacinos, or lattes, or espressos, or the other fancy-schmancy drinks Starbucks is famous for. I’m talking about plain, regular joe, the kind that doesn’t really take any effort to brew. My friend buys a tall “café Americano” every day on his way to work, and pays $4 to drink it out of a sexy Starbucks cup, with a cute little coffee cup sleeve, for a beverage that doesn’t materially taste any different from the home-style brew you’d get at your local coffee shop. Even Starbucks concedes on its website:
“While the Americano is similar in strength and taste to American-style brewed coffee, there are subtle differences achieved by pulling a fresh shot of espresso for the beverage base. The best way to discover these nuances, of course, is to try a cup yourself.”
Translation: Starbucks can’t tell you what the difference is either.
In terms of taste and how well it keeps me awake, I’ll contend that the 50 cent cup of coffee from my office canteen offers just as much satisfaction as a $4 cup of Americano. Just ask my cubicle neighbors, who have to put up with my moans of satisfaction and I slurp my morning cuppa.
Paying more for something doesn’t necessarily mean that it’s better.
We talked a little bit about insurance and why it rocks, but the type of insurance you get matters too – something I learnt the hard way.
6 years ago, my
insurance agent scammer financial planner sold me an investment-linked plan that cost me $100 a month for a coverage of $100K. Back then, it seemed like a good idea – I’d be able to invest in a sexy commodity fund, get coverage from death and disabilities and other Scary Things In Life, and when my units appreciated in value, I’d be able to cash out and buy a diving pool filled with crisp bank notes, bitches!!! Or so I thought.
A couple of years ago, I decided to pull back the hood on these ILPs (Investment Linked Plans) – Checking through the prospectus (something I should’ve done before I signed it, but I was 21 years old and clueless) I realized that a huge portion of the premiums paid – around 15% – went straight into paying off my agent’s administrative fees and commissions. On top of that, the funds I was invested in charged a management fee of around 1.5%, absolutely huge when you compare them to the management fees of passive index funds – around 0.1-0.5%. After all the fees and charges, ILPs average a measly return of around 2.5% per annum, which isn’t even enough to beat inflation. Goodbye, superdamnawesome bank note-filled diving pool!
I didn’t know it back then, but I could’ve bought another type of insurance and increased my coverage while paying a lower premium. I could’ve then taken the difference and invested it in a low-cost index fund, and after 30 years would’ve been able to afford that diving pool I was talking about earlier. Whtheck?! Yes indeed – it’s called term insurance, and I’ve officially joined the camp of “buy term and invest the rest”. But more on that later.
The thing is, most
insurance agents scammers financial planners will probably try to push the more expensive, frills-laden product on you, simply because of the way their incentives are structured. Agents are paid commissions from whatever they sell you, and it’s a pretty good assumption that the higher your premiums, the more you pay out in commissions. So they’re incentivized to sell you the most expensive plan you can afford, not because it’s the best for you, but because they’re saving up for their own damn diving pool.
So just because your brother-in-law is trying to sell you that sexy investment-linked plan with the high premiums, doesn’t mean that he’s got your best interests at heart. I’d recommend treating all insurance agents like how you would treat financial sleazeballs: do your research, question everything and take all the time in the world to decide. If you live in Singapore, there are plenty of choices for you to choose from – don’t be afraid to shop around. This decision is potentially worth tens of thousands of dollars, so it’s worth taking it slow.
Don’t get me wrong. I’m not hating on all investment-linked life insurance plans. They can be suitable for certain types of people (like people who won’t take 2 hours to read a good personal finance book). But if you’re young and healthy and sexy, I really don’t see any reason why you would fork out more money for a shitty investment. It just doesn’t make any sense.
I’ll be blogging a little bit more about term insurance and why it beats life insurance hands down for young people. In the meantime, how many of you have insurance plans that you’re less than happy with? Do you think we should change the whole structure of incentives for insurance agents? Let me know 🙂