Monday, October 12, 2009

The Biggest Chunk of Insurance Cost


Every time you buy an insurance, some ones get their commissions and that is usually considered the largest part taken away from your money. In life insurance, this fee may start at 20-50% and slowly drop to 0% in 6 to 10 years time.

This fee structure turns out to be the most crucial part why Insurance becomes the most dedicated finance tool for personals. The whole agency and distribution forces have made insurance well accepted by general public because they are paid well. In addition, it becomes one of their most solid passive income streams.

It is really hard to sum this up in a word of good or bad. No one will like to be taken away $400 from their $1,000 savings or investment what ever you call it. But then again, if such commissions scheme did not exist, many people may still be under-insured and even more people did not save anything at all.

Although it starts at a HUGE chunk, it does reduce over time. Generally the total payout is within the range of 160% to 200% over a 10 years period. So the longer you keep your insurance policy, the less effect it has on you ;
10 years old policy has an effective commission cost of 20% = 2 / 10
20 years : 10% = 2/20
40 years : 5%

It is really hard to sum this up in a word of good or bad FOR YOU.

If you bought other products that have similar features but paid lower commission, then you are alright.
If you ended up NOT saving any money anywhere else, its bad for you.
If you have to pay high medical fee later, then it could have been better if ...
If your loved ones have cash flow problem after you die, perhaps the 40% 30 years ago doesn't seem like that much after all.

It is good we keep on searching for better solution all our lives. But before we find better ones, its crucial we engage with whatever available at the time.

Commission fee structure is the biggest chunk in insurance cost. There is probably NOT much we can do to change that in near future. What we have full control in, is to assess the value we receive in return. As long as we receive services and advices that is worth more than we pay, its a lesson well learn.

After reading this, will you

(1) be more eager to buy insurance,
(2) hate insurance more now or
(3) doesn't change much of your opinion on insurance ?

4 comments:

ChampDog said...

Perhaps eager to join as insurance agents?

Michael Tsen said...

good one indeed, one may still relatively easy to become an agent as long as you have a family and friends of 4-5 policies to maintain. :)

Anonymous said...

Generally I do not post on blogs, but I would like to say that this post really forced me to do so! really nice post.

Michael Tsen said...

Thanks!