Let me state it up front: I’m not a fan of products offered by insurance companies.

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In Singapore, insurance companies no longer just provide the pooling and spreading of risks. The industry underwent a transformation decades ago that rebranded insurance agents into financial planners.

The message there being that financial planners no longer just help you plan to avoid unfortunate incidents that can happen but also prepare for the inevitable which is that one fine day, you’ll stop work but still need money i.e. retirement.

An Agency Problem

As Buffett once said, “Never ask your barber if you need a haircut.” Similarly, the common model of compensation for financial planners is a commission based on the dollar value of products that they sell. On top of this, the agency that they belong to typically has a quota that they require to meet. Add to that the problem that most people don’t really understand statistics well enough to make an informed decision and you have a recipe for being sold products that you either don’t need or is designed to benefit the seller rather than the buyer.

I’m not saying that financial planners are inherently dishonest. I’m just saying that most of them are telling you things that the marketing material tells them rather than what a person really requires for financial independence.*

Enter AXA’s latest product

Kyith over at Investment Moats did a breakdown of this product that promises escalating payout over the years. This deals with the problem of inflation (which is fantastic since most products don’t) and if you get this plan, you probably can be relatively assured that you retain purchasing power as you age.

So what’s the problem with this product?

Well, as Kyith calculated/estimated, the returns for this product (depending on the performance of the non-guaranteed portion) is probably anywhere from 1.92% to 3.75%. At the high end, that is scarcely better than the 10-year Singapore Savings Bond which has virtually no default risk.

Now, I’m using AXA’s product as an example. I don’t believe the other insurance companies can provide anything much better because their costs would be about the same and for them to generate more alpha (i.e. higher returns than a similar competitor) would be to take on more risk which may not be allowed by regulations.

There are much better alternatives

I would even argue that for such long time-frames, you could put your money in equities and expect much higher rates of return. While financial planners may argue that equity returns are non-guaranteed, I would say the same for their products. I would take my chances with the lower cost alternative which is a broad-based market ETF or index fund.

Buy Term, Invest the Rest

As far as insurance is concerned, I would remember the quote above. Buy for protection and learn how to generate returns on your own. You don’t really need an organisation to add layers and collect fees for doing nothing much more than “helping” you to invest. There’s so much information on the internet and anyway, most of us can’t really do much better than the market anyway.

*By way of reasoning, my challenge for financial planners is to show me a successful planner who made money from actual financial planning rather than their commissions.