What did you do as soon as you got your first paycheck? Me, I told a bunch of people I’d treat them to lunch or dinner, and then conveniently never spoke to them again. What do you mean that’s not how you save money as an adult? But in all seriousness, a big part of being an adult is becoming financially responsible.
The process to financial responsibility is not easy. For one thing, you have to carefully navigate around distant relatives and acquaintances who are suddenly interested in your life. Because they’re financial consultants. Now, all of a sudden, they’re descending on you, asking you to buy this policy and that policy and before long, you’re finding yourself poorer by hundreds of dollars.
Sounds like you’re going to start bashing financial consultants again. Don’t like that lah. They work very hard, you know.
They come with so many different names – insurance agents, financial advisors, life planners. You know what, let’s just refer to them as financial consultants. Look, I have no doubt that the majority of them are well-intentioned people who only have your best interests at heart.
Those are the good ones and they’re a credit to the industry. But no one can deny that there are bad consultants who aren’t interested in actually helping you, but are more focused on pushing insurance products that will earn them the most commissions.
However, the problem is that it’s usually very hard to tell the difference between a good agent and a bad one, until it’s too late and you’ve already bought the policy.
Okay, so how do I tell a good financial consultant from a not-so-good one?
When you’re starting out in life, you should at least be looking at getting affordable coverage through a life insurance policy. Basically, there are two main questions that will help you determine if the financial consultant you’re sitting down with is interested in helping you with your financial needs or not:
1. What is the financial consultant more concerned about? How much you can afford or how much you want to be covered for?
The first thing that needs to be said is that BOTH of these questions are very important. So don’t be confused if your agent seems to be interested in both these details. However, the first question a good financial consultant should ask is how much you want to be covered for.
Why? Because that sets the tone for the conversation. That sets a goal that both you and your financial advisor can work towards. It’s easier to decide which products are suitable for you by determining how much coverage you’re looking to get.
A good financial consultant will also help you determine if your coverage goals are appropriate. If you’re young, single and you don’t have too many liabilities – your parents are still healthy and working, for example – then you probably don’t need coverage of more than $200,000 at first. If your agent is pushing you to get $1 million in coverage, for no good reason, they’re probably not really interested in helping you.
That said, most financial consultants have figured this step out. So you have to look out for the next step.
2. What kind of product is your financial consultant recommending? And do they care if you can afford it?
After finding out what kind of coverage you want, comes the big question: which product is best for you? And the truth is, there’s no one easy answer to this question, because it really depends on what you’re willing and able to spend.
If you’re able to afford it, consider a limited payment Whole Life plan. This means that you pay a fixed premium, depending on your age and health status, for a specific number of years – 15, 20 or 25 years, for example. At the same time, you will enjoy a fixed coverage for the whole of your life, even after you’ve stopped paying premiums. Naturally, this works best if you time it so that you stop paying premiums when you retire, so that your retirement funds will not be affected. This is unlike traditional Whole Life plans which usually require you to pay premiums for as long as you live.
The major advantage of Whole Life plans is that your policy has an assured sum and cash value. This means that whenever you die, even if it’s of old age, your loved ones will benefit. Depending on the policy, this sum assured may also pay out on total permanent disability, critical illness, or even just at a specific maturity date. The only downside to limited payment Whole Life plans? The shorter the period you pick, the higher the premiums you’ll spend each month.
Therefore, if your monthly cashflow is unable to support that kind of commitment, the other alternative would be Term Insurance. It’s so named because you’re insured for a fixed period of time – anything from 10 to 20 years, or up to a specified age. What’s good about term insurance? It has significantly lower premiums compared to Whole Life insurance.
However, term insurance policies have no cash value. That means that if a term policy expires after the specified period of time, and you’re still alive and healthy, you won’t get anything back. The good news? You’re still alive and healthy.
A good financial consultant should advise you on these two options, and then allow you to decide which is better for your current situation. Should you go for a limited payment whole life policy that has a higher premium, but gives you coverage for the rest of your life? Or should you go for a term insurance policy that has a lower premium, but gives you nothing at all if you outlive it?
Whatever it is, you should always be wary if your consultant is recommending a third life insurance option – usually an investment-linked policy or ILP. The dangers of ILP require reading an entire separate, complicated article but essentially, while they may sound like the best of both worlds, they’re often the worst of both worlds.
Well, that’s all well and good, but now my financial consultant is asking me to buy additional products?
Don’t panic, a good financial planner should have your best interests at heart and should be recommending policies that complement your life insurance policy. For example, they may recommend disability income insurance – a policy that ensures you still get an income, proportionate to your last drawn salary, even if you are unable to work for a certain period of time as a result of an accident or illness.
If you went with term insurance, your financial advisor should recommend that you channel some of your spare income (from paying a lower premium) into some kind of long-term investment product. If you’re dirt broke, or if you’re not a risky investor, a low-cost instrument like a regular savings plan is one way to go. The reason for this is obvious. When your term policy ends, you don’t get any money back from it, so ideally you have grown your nest egg in some other way.
What do I do if my financial consultant doesn’t recommend anything to me?
Some consultants may claim that they’re not interested in recommending specific products right off the bat. This may be a good sign that you’ve found someone who is willing to spend the time to review your financial goals with more depth before they make a personalised recommendation. A good financial consultant should spend as much time as you need them to, because they want to find a balance between what kind of insurance you need and what you can afford.
But remember, the insurance industry is ultimately a commissions-based industry. With some financial consultants, their opportunity cost is always on the back of their minds – the more time they spend on you, the less they’ll spend with other clients. To make up for that, it’s likely they will push products to ensure the commissions they earn from you are worth it.
Has your financial consultant helped you make the right decision for your financial independence? Share your stories with us.