This post is way overdue…But anyway, in part 1, we talked about what human capital is, how human capital relates to the level of financial capital that one should have as well as the composition of one’s financial capital depending on the type of human capital one has.

Today, I’ll cover a topic that will probably resonate a lot more with most people- insurance. What has insurance got to do with anything? Well, if we say that human capital is an asset and is part of our total wealth, then we need to know how to protect our human capital in order to ensure that a loss in human capital doesn’t cause damage to our financial wealth.*

Now, in part 1, we said that our human capital is highest when we’re young and as we age, our human capital decreases while our financial capital (should) increases. Going by this logic, we should be worried about our human capital while we’re young and worry less about it when we’re older. What this means for insurance is that you should cover yourself when you’re in the prime of your working life and as your human capital decreases, your need to cover your human capital should go down.

Now, think of when was the last time someone selling you insurance (or financial planners as they’re more commonly known here in Singapore) told you that? Most times, a financial planner in Singapore would tell you to get a life plan that “returns” you money at the end of the plan’s life or worse still, some of them sell you an Investment Linked Plan (ILP) that combines investments and protection. If they wanted to sell you pure protection, a term plan will suffice and that’s the reason why term plans are so much cheaper- because they offer protection ONLY. All the so-called “returns” that you get from a life plan or ILP is just your own money anyway. You could easily buy term and invest the rest and chances are you would be much better off than buying those plans?

The reason for that buying term and invest the rest would probably turn out better is quite simple- (1) most managers don’t beat the market and (2) fees are a drag in returns so those commissions to your financial planner and the fees paid to the fund manager will kill your returns relative to the returns on an index and brokerage commissions.

Now, I’m going to get some flak for saying this but this is why it’s almost always not a right choice to buy insurance on the life of your child. After all, the premature death of a child isn’t going to affect one’s ability (physically) to work. What people need to do as soon as they are close to the working age, is to buy protection against death, the state of not being able to work in a full-time position and being burdened by hefty medical bills.

Anything else from an insurance agent will be just paying a hefty price for sloth.

PS: That’s why sites like CompareFirst.sg are so awesome.

Endnotes:

*Growing human capital is a whole different story. That’s why you went to school and that’s why we should never stop learning.

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