Over the 4 years of my advisory practice, I've noted 3 common phenomenons that is highly puzzling to me. I'd also like to point out the risks and dangers of such thought processes.

1. Buying endowments (aka saving plans) prior to doing any protection planning

It's quite often that I meet a referral or new client whose portfolio consists of one or a few endowment plans without any protection planning done at all. As much as there is no right or wrong in terms of whether to start retirement planning or protection planning first, the issue comes when the client runs out of budget to do any protection planning because they committed too excessively to their saving plans.

Implications

Most saving plans are fairly long term. It can range easily from 10-20 years. During this period, if the person encounters any medical issues, without insurance, their finances might be severely impacted. On top of which, if their endowments have no payment waiver, it might be a double whammy if their new found financial woes doesn't give them the capability to finance their endowments which might results in losses. Also, if the person encounters medical conditions even minor ones, they might not be able to get coverage at standard terms anymore. Let's say this person is healthy and lucky enough to wait a few years before starting protection planning. The premiums will cost more because most premiums for protection insurance are tied to age. The younger you are, the cheaper it is.

2. Their kids insurance are more than their own

Don't get me wrong, I'm not saying that we should not get insurance for our kids. Protection planning is important for both kids and adults. However, if a family has limited resources, I've seen cases where the kids are heavily covered for death, critical illness, hospitalisation, etc and the parents only have hospitalisation plans without even the rider. When encouraged to enhance their coverage, they have no more surplus left. It's even more perplexing when the kid has a higher death coverage than the parents. Does the parent depend on the child for income such that they need a massive sum assured if anything unfortunate happens to the child? The reason why parents are encouraged to have a higher coverage is because they are the resource providers and kids ultimately depend on their parents for survival. As much as parents love their kids, if their own critical illness coverage, death coverage, retirement planning, loss of income, etc are neglected, ultimately it's the kids who will suffer.

Implications

Protection planning is done to ensure that if there's anything unexpected happening, you do not have to worry about the financial aspect of the problem. Death coverage is mainly to ensure that the dependents have funds to sustain themselves even if the bread winner or caregiver no longer is around. Critical illness coverage is meant to provide a payout if critical illness happens and there's a loss of income due to a longer recovery period or a change in lifestyle like dietary changes or needing to hire a caregiver at home. Over insuring the child who is already depending on caregivers for resources while under insuring the resource providers will put dependents in very detrimental situations when unfortunate events happen.

3. Putting all their lump sum that they are willing to invest in one fund

In layman terms, this is a classic example of putting all your eggs in one basket. Do you think people like Warren Buffett has lost money in stock-picking before? Is he an overall very successful investor? Warren Buffett obviously has lost money in a single stock before however because he diversifies his investments, he may have won money in 9 of his other stock picks. So it puzzles me why people will feel comfortable putting all their money in one fund.

Implications

By putting all the money in one fund, especially if you haven't invested before it's like gambling. Generally, investing only has 3 outcomes, positive gain, negative loss or breakeven. By investing in such a concentrated manner, the basis must be strong as a concentrated investment definitely carries a more significant degree of risk compared to a diversified portfolio. Investing has risks, that's a fact. This is why even the most savvy investors also buy more than one stock, one fund or one instrument for that matter. A diversified portfolio is meant to reduce the risk and give a decent return. Probability is a science, luck is well, luck.

Granted that these are the common pitfalls of financial planning, it's perfectly alright to buy savings before protection, have more protection for your child than yourself and even a concentrated investment portfolio if you do it with your eyes open. If you are aware of the drawbacks and choose to go ahead for individual reasons, there's perfectly nothing wrong with it. :)

If you have already done the following unknowingly or wish to get started on the right foot, you should speak to your trusted adviser. Alternatively, you can also drop me a message. Coffee will be on me!

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Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.