Do It Yourself (DIY) insurance   -- buying insurance and investments separately

Do It Yourself (DIY) insurance is also called "unbundling".  It means buying investments and insurance separately. 

Insurance companies and agents usually steer you away from DIY and toward bundled insurance, which pays higher commissions.  The 3 most popular bundled policies are

(i)     Whole life,

(ii)    Regular-premium endowment (including education policies) and

(iii)   Regular-premium investment linked products (R-ILPs).  

DIY has three advantages: It is transparent, cheap and flexible.

I. DIY is transparent.  

(i) Whole life and endowment policies DO NOT disclose which stocks, bonds and property the insurance company has purchased for you.  

DIY invests in unit trust and ILPs -- which tell where they have invested your money. 

(ii) Whole life and endowment policies DO NOT disclose the returns the insurance company has earned on the stocks, bonds and property it has purchased on your behalf.   

DIY invests in unit trust and ILPs -- which reveal the fund's performance.

(iii) Whole life and endowment policies DO NOT disclose how much the insurance company is charging to manage your investment.  

DIY invests in unit trust and ILPs -- which reveal the management fee.

(iv)  Whole life and endowment policies DO NOT disclose the timing of your investment.   DIY invests in unit trust and ILPs, all of which tell if you bought low and sold high, thereby making a profit. 

Not only that, if you did buy low and sell high, insurers take some of the profit and give it to less fortunate endowment and whole life policyholders.  There is no way to know if you are on the giving or receiving end of this re-allocation.  The practice is called "earnings smoothing".

(v) Whole life and endowment policies DO NOT disclose the riskiness of your investments.  This makes it impossible to adjust your investments to your risk/return preferences. 

Insurance companies take policyholder premiums and invest them in a single “life fund”.  There, all policyholders share the same investments.  It is a "one size fits all" approach.  A fresh young graduate and an 80-year old retiree have no choice but to share exactly the same investments.

II. DIY is less expensive.

Savings from DIY are equal to the distribution costs charged by regular-premium endowment, ILP and whole life policies. 

The terminology is a bit confusing since two sets of costs are labeled "distribution costs".

The first "distribution cost" is the bid-offer spread.  It is typically 5 per cent of your investment. Both regular premium ILPs and DIY charge it.

The second "distribution cost" is found in the benefit illustration. It is of greater concern since it is more expensive.  Average costs for Singapore's 11 insurers are as follows:

(i)     Whole life:                                                                                  19 months' premiums.

(ii)    Regular-premium endowment (including education policies): 14 months' premiums.

(iii)   Regular-premium investment linked products (R-ILPs):        15 months' premiums.

On average, it costs from one to two years' premiums to pay commissions to the agent and insurance company that sold you the policy.  None of these payments go toward purchase of insurance and investments. 

DIY is cheaper since it does not charge this distribution cost. It charges only the bid-offer spread of 2 to 5 per cent of your investment. 

Please note:  Insurers claim that high distribution costs confer added value for regular-premium ILPs.  (For an analysis of this claim, click here.)

DIY: HOW TO UNBUNDLE

1) First, buy term, health or accident insurance.  Make sure it is PURE insurance with no investments included. 

Then buy an investment, such as a unit trust.  Most unit trusts offer a regular savings plan for FREE.  It permits low monthly investments, like $50 or $100 per month.  You can also use Giro.

2) A second approach is to buy a “recurring single-premium ILP” from an insurance agent.  It is a good substitute for the more expensive regular-premium ILP and you will receive an agent's continuing advice -- (along his continuing sales pitch).  

3) A third approach is to look for a good deal.  Unfortunately, (i) whole life, (ii) endowment and (iii) regular premium ILPs are costly.  Distribution costs range from 6 to 33 months' premiums. (See rankings.) 

III. DIY is flexible.  Another advantage of unbundling is its flexibility. 

Whole life and endowment policies give a pre-set mix of insurance and investments.  For example, a whole life policy might use your premium payments as follows: (i) 20 % term insurance, (ii) 30 % stocks and (iii) 50 % bonds. 

There is no way to change the allocation or even to know what it is.  (No insurance company discloses this information to its policyholders.)

DIY is more flexible.  It allows you to choose any allocation you prefer, such as: (i) 10 % term insurance, (ii) 30 % health insurance, (iii) 20 % cash payments on your home loan, (iv) 30 % stock funds and (v) 10 % bond funds. 

You can also change the allocation whenever and as often as you wish.

IV. Buy carefully.  You can easily purchase a regular premium policy without ever knowing it.  A simple check is to ask, “Can I buy this 'insurance cum investment' policy using my CPF money?” 

If the answer is “No”, it is a regular-premium policy.  For the 3 reasons explained above, you are better off to give it a pass and "unbundle" instead -- (i.e. to buy your insurance and investments separately).