Don't Fall For Children Insurance

Would you buy a car for your four-year-old child just because they might need one when they get older? Of course, you wouldn't. But, you know what? Insurance companies want you to do something just as incongruous. Believe it or not, many insurance companies want you to buy life insurance for children, just in case they might need it when they get older.

You’ve probably seen the ads on television that artfully target parents and grandparents, encouraging them to buy life insurance for children. Of course, the insurance companies don’t emphasize they are selling life insurance on children. Instead, they cloak the pitch with terms such as a “get started plan,” a “grow up plan” or the favorite, as a “college plan.” No matter how it's couched by the insurance companies, the objective is to make an easy profit by preying on the love of parents or grandparents to sell unneeded life insurance for children.

Now, don’t get me wrong, I have nothing against life insurance. After all, I started my career as an agent selling life insurance and ended up as president of one of the largest life insurance companies. I spent my career trying to peddle as much life insurance as I could, but one tactic I always thought was wrong was trying to sell life insurance on children.

Life insurance is best when used for its intended purpose.

Life insurance can be a valuable part of any financial plan but only if it is needed and can serve a useful purpose. The only valid rationale for life insurance is to cover any economic loss that may occur in the event of the death of the insured. Life insurance proceeds can replace lost income for a young family and pay off a mortgage or other debts. It can also stabilize or monetize a small business if a key player should die.

The point is, if no one will experience an economic loss as the result of an individual’s death, there is no need for life insurance. Parents and grandparents will certainly suffer an emotional loss at the rare occurrence of the death of a child, but rarely will this create a debilitating economic loss for the parents or family.

Declining Life Insurance A Mystery

Life insurance is losing its appeal in the U.S. In 1965, Americans purchased 27 million policies, individually or through employers. In 2016, a population that was more than 50 percent larger still bought only 27 million policies. The share of Americans with life insurance has fallen to less than 60 percent, from 77 percent in 1989. Why this is happening remains a puzzle. 

People buy life insurance for various reasons: to pass wealth along to future generations, to provide liquidity for mortgage payments, or to cover funeral expenses, to name a few. These motivations may become more or less important as the population shifts demographically.

Yet socioeconomic and demographic trends can’t explain the decline in life insurance, a recent analysis from the Federal Reserve Bank of Chicago has found: If various population groups had acted the same way in 2013 as they did in 1989, 78 percent of U.S. households would have had life insurance, not 60 percent.

Other evidence points in the same direction. The observed declines have been steeper for cash value life insurance, which includes a saving component, than they have been for term life, which does not. Another study looking specifically at cash value ownership found that neither changes in demographics nor in the tax law (which can affect the incentives to hold cash value policies) can explain the declines from 1992 to 2010.

The puzzle deepens when one examines life expectancy, which clearly should influence decisions about life insurance. Theoretically, the lower a person’s chance of dying over a given period, the less should be his or her desire for life insurance during that time. And over the past few decades, overall life expectancy has risen.

But this otherwise plausible explanation doesn’t work when you take a closer look and see that life expectancy has been rising rapidly only among higher earners. For lower earners, it has been stagnating or even declining. The top 40 percent of male earners who reached age 50 in 2010 could expect to live seven to eight years longer than those who reached that age in 1980. But there was little to no increase for the bottom 40 percent of male earners across those generations, a National Academies of Sciences panel that I co-chaired found.

If life insurance changes were being driven by life expectancy, we would expect ownership to fall less (or perhaps even rise) among lower earners and to fall more among higher earners. Instead, the opposite has happened.

In 1989, 76 percent of Americans with a high school diploma owned any kind of life insurance. By 2013, that share had declined to 55 percent. For those with a college degree, ownership fell only to 73 percent, from 88 percent. Similarly, among people in the top 20 percent of the income distribution, life insurance ownership fell to 85 percent from 94 percent, while it dropped to 27 percent, from 44 percent, among those in the bottom 20 percent of income.

Perhaps people in low-income households can no longer afford policies, or they don’t consider it as necessary as they once did to protect against financial risk to their families. Another possibility, though, is that policy pricing is having an effect.

Most individual life insurance policies require a medical exam. If the health of lower earners is deteriorating relative to that of higher earners, the price of life insurance for them will rise disproportionately. And if life insurance companies put more weight on the risks to life than the individuals do, they’ll end up with policy pricing that’s unattractive to lower earners.

It is also possible that industry changes have affected life insurance purchases. Over the past two decades, many insurance companies “demutualized” by shifting from being owned by policyholders to being owned by shareholders. Mutual insurance companies appear more inclined to sell life insurance, and so this broader industry trend may be affecting how policies are advertised and sold. Evidence suggests that term life policies became cheaper as they became more widely available on the internet, which may be why term policies have declined less dramatically than cash value policies have.

Finally, although fewer people are buying life insurance, those who do are buying more valuable policies. Apparently, while some families are deciding insurance isn't worth buying, others consider it such a good idea, they're buying more. That only makes the puzzle harder to solve.

Fatal Accidents RM2.3 Billion Losses

Accidents cost lives, but just how much is a life worth from a monetary point of view? According to a study conducted by Universiti Putra Malaysia (UPM) on the economic aspect of road accidents, the cost of a life lost as a result of a road accident works out to be RM2.3 million.

According to road safety department (JKJR) director-general Datuk Rosli Isa, road accidents involving 6,740 casualties had incurred costs around RM15 billion. The value stipulated in the study included medical and insurance costs.

“Accidents cause the country to lose important assets, while families experience difficulties. The main cause of accidents are drivers’ attitudes, such as being careless, not abiding by road safety rules and using mobile phones while driving. Most motorists commit this offence, but on the whole, the victims are motorcyclists,” he said.

The number of fatalities from road accidents in the country has never dipped below 6,000 since 2003. While last year’s numbers were lower than that of 2016, in which there were 7,152 fatalities, it’s still higher than that the 6,706 deaths recorded in 2015. In the first nine months of 2017, it was reported that 5,083 deaths had come about from 400,788 road accidents.

Last year, the government said that existing road safety campaigns had filed to reduce the number of road accidents in the country, despite the ministry of transport’s (MOT) Road Safety Plan 2014-2020 looking to reduce the number of deaths and serious injuries by 50% by 2020.

Allianz Profit Falls

Allianz Malaysia, the local unit of German financial services giant Allianz, said Thursday its net profit fell 3.6% in the fourth quarter partly due to higher net benefits and claims and other expenses.

Net profit for the three months ended Dec. 31 was 86.78 million ringgit ($22.14 million) compared to 89.98 million ringgit a year ago, the company said in an exchange filing. Quarterly revenue was almost flat at 1.21 billion ringgit.

The company said it will expand its distribution capabilities including venturing into digital partnership and moving into online sales platform for its general insurance segment, adding that life insurance operation will continue to adopt a multi-distribution strategy.

Missing Out BR1M

Thirty-four per cent of households in low-cost flats in Kuala Lumpur that are entitled to Bantuan Rakyat 1Malaysia (BR1M) cash handouts did not receive it, according to a study by Unicef Malaysia and DM Analytics.

“It’s a matter of inclusion. [These households] don’t have social protection,” said Dr Muhammed Abdul Khalid, managing director and chief economist of DM Analytics.

Having surveyed 966 households, of which 78% earn below the maximum threshold of RM4,000 that entitles them to the financial aid, the study found that as many as 45% of those earning between RM3,000 and RM3,999 did not receive BR1M handouts.

“The figure [of those receiving it] should be 100%, but a lot of them say they do not have enough information on how to apply,” said Muhammed at the launch of the report yesterday.

Conversely, 46% of households earning between RM4,000 and RM4,999 and 35% of households earning RM5,000 and above, received BR1M handouts although they were not entitled to it.

What is worrying is that some of the families that did not receive the aid were entirely dependent on such assistance.

One respondent shared that she depended on BR1M handouts and other forms of financial aid to feed her family as her husband was too ill to work and she was unemployed due to having to care full-time for her youngest of three sons.

Worse still, 77% of the households surveyed have no savings and less than 4% of households received zakat or assistance.

The study also found that 33% of respondents have no social safety net in the form of savings in the Employees’ Provident Fund, Social Security Organisation or medical and life insurance.

The findings are underscored by the fact that relative poverty, which is considered as those earning below RM2,614 — which is half of the national median household income of RM5,228 — stands at 54% for residents of Kuala Lumpur’s low-cost flats.

“When you use the Kuala Lumpur median income of RM4,536, relative poverty shoots up to 84%,” Muhammed said.

In absolute terms, while official statistics show that poverty has been eradicated in Kuala Lumpur, 7% of respondents live below the poverty line, the report said.

Worse still, in relative terms and adjusted for household size, almost all children living in the low-cost flats covered by the study live in relative poverty.

Unicef Malaysia recommended that universal childcare allowance be introduced as a social protection floor, which would see handouts being distributed on the basis of every child below the age of two.

Although existing policies administered by government ministries have targeted nutrition and financial assistance for children, Mohammed stressed that the outcome of these measures had not been monitored.

For example, the ministry of education provides monetary assistance and private preschool tuition fee assistance annually for households with income per capita below RM500, food assistance for poor students, as well as free milk distribution to schools.

Meanwhile, the ministry of women, family and community development hands out children allowance amounting to RM100 per child monthly with a maximum of RM450 per month for households with more than four children.

The women, family and community development ministry’s policy and strategic planning division undersecretary Chua Choon Hwa said there is a need for greater inter-agency collaboration within the government itself in order to come up with solutions to poverty and poor malnutrition.

“The report is a wake-up call to our ministry that more needs to be done to fill in the gaps,” he said at a panel discussion during the launch of the report yesterday.

Deputy representative and senior social policy specialist at Unicef Malaysia Dr Amjad Rabi, meanwhile, called for more supply-side assistance from the private sector. He stressed that all parties need to collaborate in order to eradicate child poverty.

Manulife Profit Slumped

Manulife Holdings Bhd’s net profit for the fourth quarter ended Dec 31, 2017 (4QFY17) fell 76.4% to RM6.64 million or 3.28 sen a share, from RM28.1 million or 13.88 sen a share a year earlier. 

This is despite a 76.7% jump in revenue to RM401.5 million from RM227.3 million in 4QFY16.

In a filing with Bursa Malaysia,the group said its investment holding segment, life insurance business and asset management services all saw weaker performance in 4QFY17.

For the investment holding segment, operating revenue fell 11.6% due to lower investment income from fixed income securities. The loss before tax (LBT) widened to RM2.7 million following higher management expenses.

The life insurance business saw a decline in profit before tax (PBT) of RM19.4 million due to higher reserving of actuarial liabilities as a result of lower Malaysian Government Securities (MGS) yield and worsened claims experience.

This was despite operating revenue for the segment rising by RM56.2 million mainly due to higher single premium income recorded from investment-linked fund.

Manulife’s asset management services slipped into the red as it recorded a LBT of RM1.6 million, compared to a PBT of about RM700,000 in Q4FY16, mainly due to higher management expenses and allowance of impairment of intangible asset in current quarter.

For FY17, the group’s net profit fell 39.7% to RM28 million, from RM46.4 million in FY16.

This was despite revenue increasing 30.4% to RM1.35 billion, from RM1.04 billion in FY16.

Manulife has declared a first and final dividend of 8 sen per share to be paid on a date to be fixed later.

Moving forward, the group remains cautiously optimistic on the back of strong economic growth, a buoyant stock market and its growing asset management business.

“Within our life insurance segment, we are expecting to return to growth in our top line, primarily facilitated by a recovery in our bancassurance segment and commencing sales within the group’s newly established Labuan subsidiary,” it said.

Manulife, however, pointed that medical claims continued to be a challenge for its life insurance segment.

It added that it targets to achieve its first year of profitability for its wealth and asset management business in 2018 as it expects to see continued growth in gross flows and asset management business.

In the medium term, Manulife believes there is a growth trend in Malaysia for the life insurance industry, supported by the under penetration of life insurance coupled with growing affluent population, which creates a need for insurance and investment solutions.

Manulife’s share price was last traded at RM3.30, giving it a market capitalization of RM667.8 million.