Wednesday, 5 January 2011
Term or Whole-life insurance?
There are lots of debates on this subject matter in many blogs.
The latest buzz is to buy term and invest the rest - skip whole-life.....
What do I think? It depends. Huh? You don't blog when you don't have an opinion. My answer is still, it's different strokes for different folks. We are dealing with (irrational) people remember?
It all boils down to why we buy insurance in the first place?
1. If it's purely to provide for love ones, then its term - maximum payout for the equivalent whole-life premium.
2. If it's getting our premiums back and then some (at least that's what we think!) after X years, then it's whole-life. It's more about me, me ,me; and not so much about our love ones. Look into the mirror - how long can our love ones survive on the whole-life policy we've bought?
3. Now many "experts" tell us whole life is a "bad" investment - most of the premiums go to commissions and profit to company (which is true). The surrender payout yield is only 2 to 4%.
But 2 to 4% yield isn't so bad compared to fixed deposit interests today. And buy term and invest the rest is on premise that we can earn a yield higher than 4%. For those of us who has been investing for more than 10 years (why 10? It's long enough to include both bull and bear market cycles), what's our CAGR? 2 to 4% don't look too bad compared to negative returns at all.
It's our personal investment track record that should guide us. We know ourselves best. (How many got out before the 2008 credit crisis? Even with the recent recovery, how many are still under water?)
For those who have yet to achieve consistent returns, then "invest the rest" is "promise". Which is no different from the what whole-life promises - good year more bonus, bad year bonus can be cut to nil.
Whole life can also be a good "forced" savings if we are one of those people who can't stop spending once there's cash in our hands (I think having nagging wife works better. Japanese wives are the best - they take all our take home pay!).
It's also works well when we have the urge to gamble with our nest eggs - be it in casinos (opps! Should I say integrated resorts?) or stock markets. Statistically, most retail investors lose money in stocks, but statistics lie big time!)
4. Maybe a better question is do we need insurance at all? And what type? We buy those that we need. Financial literacy first, then know ourselves, then decision.
Ever wondered why multi-millionaires say in the papers they have X and Y amount of insurance? You mean their net worth or estate can't sustain their love ones if they are gone? Can it be they have financial advisers that can sell ice to Eskimos? Now that's million dollar round table for you!
5. Me? I bought insurance from a childhood friend when I was 27. Glad he didn't screw me up. It's 30% whole-life and 70% term. Why be black or white? Shades of grey is cool too.
I will be cancelling all my policies when I hit 47 - whole-life breaks even after 20 years (OK, after inflation adjusted, it's still a loss). My net worth will take over as the "insurance" payout if something unforseen happens - and that includes diability and critical illnesses. Hospital and surgical? I'll put medisave and medishield to the test!
Insurance is: we win when we lose; we lose when we win. I am confused now.....