OFW Journals (OFW Stories on the News) and Some OFW Employment, Career & Business Tips

Life Insurance or Investment Product?
Posted by: "Angelica Llanes Vilvar" seasoned_advisor@yahoo.com.ph angie_vilvar
Mon Feb 19, 2007 9:25 pm (PST)

Can't choose between life insurance and an investment product?

Many will say that these are two very different things because they cater to totally different needs. Hence, it is commonly said that if the client wants protection, then give him life insurance, usually a choice between ordinary life and term. But if he wants his money to grow, then investments would suit him better, perhaps mutual fund, the stock market, etc.

However, many financial products & services providers would agree with me, that in actual experience, we do encounter clients who thought they wanted an investment product, but when given an option between, say for example, a mutual fund, and a life insurance product that also offers a good rate of return, many of our clients chose the latter. These are, ftentimes, special endowment policies. This is of course after showing them the limitations of both and finding out their personal situations and objectives, including their risk profile.

If you are an insurance agent or a financial planner, what does this tell you? That perhaps we should not confine what we recommend our client, to what he says he wants or prefers as revealed in our fact-finding interview. We should still explore other options which our
client may fail to see would benefit him. This is not to say, however, that we do not give him the freedom to choose. It is simply helping him explore other options that our client may still fail to see how he would benefit from them.

I have read books, articles, and discussions that criticize life insurance agents, including those who also practice as financial planners, for recommending life insurance even if the client initially wanted investment, or for selling whole life when they can offer term insurance instead, or for selling life insurance for children, saying they don't need it because children have no dependents. I believe these stereotyped notions and I would say
half-truths, which sometimes come from other financial planners who are not insurance agents, including foreign authors, shouldn't discourage the professional insurance agent who is truly doing the right thing, even if these are considered wrong in the eyes of (may I say) biased people. (Of course, there are also scrupulous agents, just as there are scrupulous lawyers, and scrupulous doctors, etc.) These critics fail to see the whole process that the insurance
agent took before the final sale was arrived at.

To give you a more concrete example, let me narrate a true story of a young OFW couple in their late twenties, who was considering where to invest their savings of a million pesos. They surfed the internet and later became particularly interested about mutual funds and a bank's "double-your- money" offer, after reading about many other options. They were interested to seek my advice so I went through the usual extensive fact-finding interview, including their investment objectives, etc.

I learned that they were not ready yet for any equity-laced investment. In fact, it took a while before they could have an appreciation of the concept of a bond's marked-to-market valuation. After considering other factors, they became sure about investing for the long-term on a fixed-income mutual fund, and the deal was closed. They were happy even with a modest 9% illustrated projected yield on the bond fund, knowing that was not even guaranteed. Using
this yield, they also agreed to add the equivalent of P500,000 each year in order to meet their income objective. In addition, I encouraged them to continue to educate themselves further about investments, as this would help them make much better investment decisions in the future. I told them it would be good also to read about equities or the stock market.

This couple's situation was quite unique, as it seemed that neither of them needed to buy life insurance since it was part of their benefit as employees (both of them are) in their parents'
corporation that their board and lodging, and their children's education from elementary to high school, would be taken care of by the corporation. The company's obligation ends when the children enter College. Hence, they had it all planned that when that happens, they would just settle back in the Philippines and retire from their overseas job.

I had already given them what they wanted. But, I still saw the need for them to have a contingency plan that would ensure the children to finish College in the event a parent dies and their investment isn't enough yet. They had earlier said that they would surely not consider any educational plan since that was the time many pre-need companies offering traditional education plans were in trouble. To show them I respect their opinion, I did not attempt to make them change their mind about it. I also wanted to preserve our very new business relationship. Hence, I asked permission if I could introduce a life insurance product, specifically a special endowment policy, which will answer a certain need they have not even foreseen.

I showed them how the death proceeds of that policy with a 2.2M face amount would be able to fund the college education we projected for two children in the event of the insured's death anytime. Otherwise, at the end of 20 years, the policy matures and the total cash benefit received is equivalent to having an IRR (internal rate of return) of as much as 9.3% p.a. It is like putting your money in a bank account with an interest rate of 11.63% p.a., less 20% tax. The 20th-year cash proceeds could enhance their targeted retirement income. And while the insured is still alive before maturity, the same policy also allows them to receive annual dividends of up to 8% of the policy's face amount which they can use for College.

Wow, a policy that will provide them life insurance coverage, plus a college fund, plus additional retirement fund. The program indeed matched the couple's investment profile, their timetable, budget, etc., and this was attained because a complete fact-finding (and
feeling-finding) was done. Why was a term insurance policy not OK for them? Because they were after getting a good return for their money whether they live or die. Was the deal closed? Amen! (Note: The insurance plan involved is indeed a favorite among our Chinese clients. Unfortunately, this is due to be phased out on March 1, 2007 to give way to New Generation products to adapt to the changing market conditions.)

Not only that, before the couple left Pinas, they said they had $3,500 and asked where they can place it. I asked them some questions. "Is this just a one-time placement or would you be
expecting to have more dollars, maybe regularly?" --Just one-time. "Can you add $500 more?" --We have some extra pesos so we can still buy $500. "For how long would you park your money? --We don't really expect to use it in the near future, so I suppose we could park it for many, many years? "Are you investing it for a specific goal or need? Or a targeted rate of return?" --None really. It's just extra money which we don't want to spend. "Do your children have a savings program or would you want to prepare them to having an investment mind-set?" --That would be good! "I have in mind an investment-linked life insurance product. So it is OK if we place in the names of your children; hence, they will be named as the insured?" --That would be nice too.

That was a Variable Life policy (VUL) with a minimum of $2,000 one-time investment for each of their two children, allocated on a dollar bond fund which has been making a one-year return of 16% on the average, based on past performance. This is something similar to a mutual fund, and also allows additional investments anytime.

What's my point? I just want to encourage fellow financial products and services providers or agents, and financial planners as well...(1) not to be intimidated by what we read (as I have
mentioned above in the first and fourth paragraphs) which may seem to be gospel truths but may actually be just stereotyped biases; (2) to do a good job at fact-finding; (3) not to jump into a fast sale or to do any shortcuts because it takes patience and concentration to be able to do a good evaluation on a client's case.

Hindi po ako nagmamagaling but I hope you will be able to pick up at least one good "aha" (that's what we say when we hear a new good idea) which could help you in your next case. Who knows...even those who are contemplating on putting their money in life insurance or in an investment product may be able to pick up at least one good "aha" from the above (long) story. I have other stories to tell, not necessarily my own, which I hope I may be able to share
also some other time. Happy selling / happy buying to all!

God bless,
Angie V.

http://finance.groups.yahoo.com/group/pwedenabook/message/10921