My answer to this question is, it depends on the type of insurance. I would buy casualty insurance which would pay me when an unexpected incident strikes, but I definitely would not buy any investment-linked insurance.
I think casualty insurance is useful because the probability of the something bad happening is low but the downside is large. I am willing to pay a small amount of money a month for a peace of mind. The insurance payout can offset the trauma I'll likely feel if an unexpected incident occurs so I can sleep well at night, knowing that I won't suffer a large loss if something untoward happens to me or my property.
Then, lets move on to investment-linked insurance.
In an investment-linked insurance you pay the insurance company a fixed sum of money per month/year, then you get back a big sum of money after a long time. Basically, the insurance company will help you invest your money in the markets, then pay you the returns + principal a few years later. Most of the time, they invest in bonds and stocks.
So why don't I like investment-linked policies?
1. Do you know that insurance agents take a cut of the premiums you pay as their commissions? I believe they take around 50% of the premium you pay for the first year, but the cut they take will slowly decrease as the years pass.
This means that the money they invest for you is lesser than what you paid for, and this will result in a lower return because of the power of compounding.
An example:
Let's say you invest $4 a year for 10 years, assuming a return of 10%, you will receive $70.12 at the end. Rate of return = 12%
If there's commission, you pay $4 a year but they'll only help you invest $2 for the 1st year , $3 for the 2nd year, then $4 for the rest of the years. You will receive $62.57. Rate of return = 10%.
By giving your insurance agent a commission, the return of your investments fell by 2%.
2. Insurance companies take your money and invest it in the bond and stock market. Do you know you can do the same? Why should you pay them to invest your money when you can do it yourself. Just set up an account with any local brokerage and you can invest in the same securities as they do!
Insurance companies are usually very conservative. To mimick their returns, you can build a conservative portfolio as well. Invest your money in blue chips like banks (OCBC, DBS, UOB), SPH, Singpost, SIA... These companies are very stable and they pay out dividends every year. Take the dividends and reinvest. You will likely get a higher return when you DIY compared to the insurance company. This is because they need to pay their employees to run the investments. If you invest in the market on your own, all the dividends GO TO YOU. And naturally you get a higher return. Simple as that.
In view of the two points above, I would definitely recommend you to DIY! You might think that you don't know the stock market enough to invest. Then my advice to you: it's time to read up! Investing in stocks and bonds is a good way to prepare for your retirement. If you just keep putting your money in bank accounts, the bank's interest rates never fight inflation & you will slowly watch your money erode away.
Of course, I am not saying there are no downside risks in investing in the stock market. Two ways to minimize the risk in my opinion are to to invest in blue chips (which have a very low probability of collapsing) and diversify. In other words, don't put all your eggs in one basket!
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