Chapter 04 · Insurance in a financial plan
Do not mix the jobs
A financial plan has separate jobs: cash for the near term, insurance for the unbearable loss, and investments for the money that must grow. Products that claim to do all three at once usually do the one you needed least. This chapter is a separation you can draw on a single page.
Write the jobs before you meet a product
Job one is an emergency reserve in a place whose value does not jump, large enough for several months of unavoidable spending. Job two is term life cover sized to the income gap, and health cover sized to a hospital bill you cannot pay. Job three is long-dated money in funds or other assets whose swings you can survive, aimed at costs that are years away. Job four, if it exists, is debt repayment where the interest is higher than the return you can honestly expect after tax on a safe alternative. A product is allowed into the plan only when you can point at the job it does, and only one job.
The usual blend, taken apart
A bundled life policy that invests in funds and also pays a death benefit is trying to do job two and job three. Split it in your notes. Ask what a pure term policy for the same death benefit would cost. The difference in premium is what you are really sending to the investment account. Then ask what that investment account charges, and what you would pay in a direct fund with a similar mandate. If the bundle loses both comparisons, it is not convenient. It is two expensive products sharing a logo. Convenience is worth something. It is rarely worth a permanent extra percentage point.
A health policy bundled with a small investment account has the same shape. The health contract still needs to be read for caps and exclusions. The investment slice is usually too small to matter and too expensive to respect. Buy the health contract you would buy if it had no gift attached.
A page that keeps them apart
| Job | Vehicle | What does not belong here |
|---|---|---|
| Bills for the next few months, and shocks you will simply pay | Bank balance and a short-term debt fund or deposit you understand | Equity, and any product with a lock-in or a surrender charge. |
| Death or a catastrophic hospital bill | Term life, health cover, with the contract read | A savings rate you are proud of. That is not the job. |
| Costs five years and further out | A mix of funds whose mandate you have read, sized to the date | Money you will need in eight months. The date disqualifies it. |
| High-interest debt | Repayment | A new systematic instalment into equity while the expensive debt sits untouched, unless you have done the arithmetic and written it down. |
When a salesperson is in the room
- Ask which single job on your page the product performs.
- Ask what it costs to do that job with a product that does nothing else.
- Ask what happens to your money if you stop paying after three years. The surrender table is the product.
- Take the illustration home. An illustration that shows a return is an assumption. Find the page where the assumption is stated, and compute the cost drag beside it.
- If you cannot answer these after reading the brochure, you are not slow. The brochure is doing a job other than informing you.
What to remember
- Cash, cover, and long-term investment are three jobs. Give each a vehicle.
- A bundle should be split on paper into the premium for pure cover and the money left for investment, then each piece compared with a specialist product.
- The surrender table tells you the real lock-in.
- An illustrated return is an assumption plus a cost. Read both pages.
- A product that cannot be tied to one job does not go on the page.