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To insure, or not to insure
The concept of insurance is as old as civilisation itself. The financial Web site Investopedia sets the beginnings of what we understand as “insurance” in Babylon, where it was literally written in stone in the Code of Hammurabi. The code made provisions for anyone who had taken out loans, but was unable to repay because of some unexpected event, namely, an accident, natural disaster or death.
Elements of the code would travel and evolve in Europe’s Middle Age, but the concept would only reach full maturity in the 1600s when trade and travel extended to the New World. Then, insurance was for the relatively wealthy who could afford it. Today, the average citizen can access a variety of insurance products, from those covering their lives, to those designed to replace items as mundane as laptops and televisions in the event of a burglary.
At its basis, insurance is supposed to guard against the future’s uncertainties. It has been the cornerstone of many generations of citizens’ financial planning. The most recently available Central Bank figures appear to support this as the number of policies bought increases from year to year. In 2010, total number of policies in force (life and annuities) was 670,421. In 2011, the figure was 668,149. In 2012, total life and annuity sales equalled 702,925.
In some cases, insurance is unavoidable. The laws of this country mandate that drivers must at least have third-party insurance. But is there a subtle shift happening?
Only last week, the Central Bank Governor Jwala Rambarran, referred the ongoing economic crisis as “constantly mutating.” In this new financial reality of instability and collapse, are people choosing to forego what may be termed “traditional” methods of securing their financial future, with insurance being one of them? And, are there alternatives to the products that insurance companies provide and are people accessing or creating them?
The Sunday BG set out to have these questions answered.
Just a regular, average family
*Mario holds a junior managerial position at a financial services firm. He has been at the company for 14 years since leaving university. Heading into his forties, his expenses and responsibilities have expanded significantly over time. They now include a wife and two young children and a small house that Mario is hoping to renovate. Theirs is a two-car household, since their respective schedules do not permit Mario and his wife to share a vehicle. They do share the bills, chores and the parenting of their children. However, Mario considers himself “old school.” Even though his wife works, he thinks he is ultimately responsible for his family’s financial well-being and the maintenance of their lifestyle, which includes extra-circular activities for the children, regular outings and annual vacations.
“This was the way I saw my father do it and my grandfather do it. I couldn’t see myself not doing it. This is what family is and we are just a regular, average family.”
His upbringing led him to purchase life insurance for himself. He related a story to the Sunday BG, an incident he said would stay with him for the rest of his life. He witnessed the death of a neighbour in an accident one morning as he was driving to work.
“I remember thinking that I had only seen him 15 minutes ago as he was coming out of his driveway. I told him good morning. Only to drive down the highway minutes after and see his vehicle totally written off. I realised it was him because I saw the license plate. I called his wife to tell her.”
The most chilling thing about the experience to Mario was that it could have just as easily been him. Having life insurance gives him a sense of security. His feelings are that if something like that were to happen to him, his family would be at least be covered.
Understanding risk and the need for insurance
Lloyd Ince, president of the Caribbean Financial Planners Association and a financial consultant, said, acknowledging the dangers one was exposed to in the course of life was key to understanding why insurance was necessary.
He said there was always a chance that these dangers or “risks” could occur. If they did, there needed to be some way to indemnify or replace the financial loss that would occur, should something happen to a family’s main breadwinner or to property. Regarding human life, Ince said risk could be categorised into three general groups: premature death, disability and retirement.
“When something does occur, someone or something has to replace income loss. That could be a savings plan, it can be a relative who steps in to support a family, but very few self respecting people wish to depend upon charity to support themselves in case of risk. Insurance becomes valuable. Medical insurance will cover healthcare cost, it can cover income replacement. Life insurance will cover the loss arising out death of a person. A pension plan will cover loss of income arising out of retirement.”
But protecting against risk to life is only part of the equation. Barry Thomas, is a financial consultant and an enthusiastic supporter of the concept of life insurance. An adviser and trainer with over 20 years experience, some of which were spent in insurance sales, Thomas told the Sunday BG that creating a legacy was important as well.
“You could make one payment on an $800,000 policy, or a $4 million policy and on the way to do the medical, get run over. Your family is good to go. That’s the miracle of life insurance. You instantaneously create an estate by signing your name on that document.”
Thomas said this is what will enable people like Mario to continue their “dreams” for their families, whether this was a tertiary education, paying off for a house, or starting a business, even though they were no longer in the picture. He also saw the benefits of critical illness riders to life policies which enabled the average person to afford expensive healthcare.
“How many working class people can save $500,000 to $600,000 to handle an ongoing cancer situation? Or cardiac surgery? Most people can’t come up with that kind of cash in an emergency. You have policies that are doing that.” Thomas added that possession of a life policy was a sign of good financial health and management, particularly if one was able to maintain the policy in force for a lengthy period. Owners of life insurance can use their policies as collateral to purchase property, Thomas said.
In the event of the demise of the policyholder, the policy would pay off for the property and the holder’s family could still retain ownership of it. But, as enthusiastic as he was for pure life insurance, Thomas was unabashedly critical of “investment-linked” or mixed policies. These combine a life insurance policy with and an annuity or pension payment plan.
Insurance companies put the income arising from the sales of these types of policies into multiple business areas, hoping for a return sufficient enough to keep the client ahead of inflation in the future in his retirement years. According to Thomas, their main fault was that a return could never really be guaranteed.
“These modern policies...you don’t know what they are going to deliver to you. They (the companies) don’t know what is going to be delivered to you. These move and fluctuate with the stock market. Right now, for example, what are investment-linked policies paying? Nothing. Because the stock market is paying nothing. This is a personal bias. Feel free to say so, but the best form of insurance is rock solid, ordinary life insurance.”
Damian Carribon is an insurance salesman attached to one of the larger companies in the market. His day-to-day experiences convince him that a move toward these “mixed” policies was inevitable.
“Even in programmes designed for critical illness or disability, the possibility exists that throughout the client’s lifetime, the client may not become critically ill or disabled and, as such, quite possibly would want to be in a position to recoup a certain percentage of the premium they would have contributed over the years. If you become sick or disabled, there is money to assist with your medical and your normal monthly expenses. If nothing happens, there is money to help you with retirement or some other expense you may have in the long-term future. We try to make it win-win situation for the client as much as possible.”
Carribon said changes in the way people view life, work and retirement was responsible. Using his own clients as reference points, he said that generally people were thinking about retiring earlier to enjoy what they have worked so hard to earn. Industry umbrella body, T&T Association of Insurance and Financial Advisers (TTAIFA) points to the economy to support Carribon’s assertion. In an e-mailed response to the question of a shift towards mixed policies, TTAIFA confirmed this was so.
“The economy has changed, so people’s lifestyles have changed and so, too, their needs. The market has to respond to the ever changing needs of clients.” A breakdown of statistics from the Central Bank shows that the total number of insurance sales for life insurance and annuities have grown. In 2010, life insurance sales were only 5,803 above combined annuities. By 2011, sales of annuities began to outstrip sales of ordinary life by 10, 361. By 2012, this distance grew by 15,095.
But, despite this, the consultants and agents the Sunday BG spoke with felt there was a significant ignorance about insurance. Thomas blamed the industry and the agents for the state of affairs. “The product is very badly sold and very badly marketed.” Ince thought both the public and the agents contributed.
“An individual may not recognise the need for insurance, or they may be ignorant of the concept. Sometimes they may have had a bad experience with a product or a practitioner. But the need for insurance exists. Life is at best uncertain.” TTAIFA defended agents against the claim acknowledging that while maybe the perception of insurance as a scam, and its agents as “smartmen” might exist, the fact was that most agents were professionals and that only a handful had done little to enhance their knowledge over the years.
The umbrella body said it is registered with the Accreditation Council of T&T as a training provider and has invested hundreds of thousands of dollars in developing and executing courses for agents. TTAIFA said that agents are being trained to recognise the needs of their clients, build relationships and sell according to those needs.
“They have to identify the relevant shortfalls in their lack of life/term insurance to meet their families present and future needs in terms of mortgage payments, food, shelter, clothing, education for their children etc should the breadwinner become disabled, die too soon or even live long where a proper pension is needed.” The umbrella organisation said prospective clients should take on the responsibility of checking what industry relevant courses the agent had done before doing business.
Carribon, meanwhile, believed there was another area people needed to take a little more responsibility. “In my job, I realise a lot of people say the government will pay me a pension.” The insurance agent said that the $3,000 a month pension distributed by the National Insurance Board may be unsustainable given the finite nature of the country’s oil and gas resources. He said the possibility may exist that future governments may cut back. In such a case, he advised the public to be able to provide for themselves.
But does that mean you have to be insured in order to provide for yourself? Next week we interview two individuals who do not believe this to be the case in Part II of our series, “To insure or not to insure.” *not real name
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