The Problem: Overpaying for premiums for coverage he does not need

Saiful has been overpaying a 20-year insurance policy (aka the savings plan/endowment type), which drags him down to a low 5 figure sum of annual premiums. Not that he couldn’t afford it but after a few years (he bought it in 2010), he didn’t see the point of continuing and felt he could better use that money somewhere. However, the straw that broke the camel’s back was the fact that he really didn’t see any tangible return of investment from paying the premium every year.

In retrospective, he told me, “…it was because I was supporting a relative”. I was not surprised because this is how most insurance savings plans are being sold.

It was really a pain in the butt for him, but before he made any decision to stop paying for the policy, he wanted a second opinion from a professional.

The other thing is that he felt he had a redundant medical insurance policy because his current employer provides unlimited medical coverage as long as he is with the company.

He was pondering – should he cancel or or keep this medical card?

The Solution: Cover what is important with lower cost

I instantly knew Saiful wasn’t optimizing his money the way he should be. I confirmed his “feelings” by facts and data. I would not reveal the details of the endowment plan here but we were able to confirm that the one time loss for surrendering this policy is RM 18k+, compared to the accumulated premiums paid since the policy inception.

However, this also meant, he could channel the 17 remaining annual premiums into, say, fixed deposits compounded at 3% per year…and I showed him that that will be worth RM 225k in 17 years. Compared to the Guaranteed Surrender Value of RM 127k of the policy, he would have “gained” RM 76k.

This is more than enough to cover the one time loss of RM 18k+ by surrendering this policy.

Then I gave Saiful another perspective – why stop there and put into FD only? If he is disciplined enough to still invest the annual premiums he would be paying anyway for this endowment plan for the next 17 years, compounded at 10% per year, he would have RM 448k.

There is a huge opportunity cost there due to inaction.

Secondly, I recommend that he get a deductible medical card (one of the most overlooked aspects of retirement planning) with 3 benefits relevant to his current scenario –

• (1) no overlap with company medical coverage before age 55
• (2) lower cost compared to a full medical card
• (3) guaranteed convertible to a full medical after age 55 (expected retirement age)

The only catch is that he need to remove the existing medical card rider from his current ILP because the insurer for that medical card does not have a deductible medical card product.

The Results

With much clarity after my analysis, Saiful can see the benefit of his insurance restructuring exercise. He concurs –

“The most useful part of the advisory process was that on how you educate me on optimizing my spending on maximizing coverage at the lowest cost“.

He added –

“I like the common sense advice you give on things and the details of it – even though I tend to forget, I still like the details you explained because I am a detailed person.”

He now only pays less than half the total annual premiums he was paying, but with a better coverage. Moreover, it frees up his cash flow to be channeled into proper investment tools for wealth accumulation.