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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.....


16 comments:

  1. Thats a nice take. i too believe that there are shades of grey.

    But i believe that for most cases when there are vested interest, misrepresentation will occur.

    Drizzt
    InvestmentMoats.com

    ReplyDelete
  2. Hey SMOL,

    I think this is a very balanced view of things. It's hard to follow an expert and apply his advice throughout the whole population without considering the opinion of YOUR OWN.

    ReplyDelete
  3. Thanks Drizzt! We share similar grounds when it comes to yields and returns. Your investment moat is excellent for newbies to dividend investing. Your metrics like Payout ratio and Free Cash Yield are some gentle reminders to readers: a little knowledge can be more dangerous than no knowledge. There's more to dividend investing than just looking at yields. The same applies to insurance.

    La papillion (now that's a nick!), you have given me and idea for my "chap pa lang" blog. I can share more of the oldies of my generation. Ha ha!

    ReplyDelete
  4. yeah thats the thing but too bad we don't get alot of good growing companies with those 2 metrics at a right price.

    hope i find one first.

    ReplyDelete
  5. Hi SMOL,
    You said,
    1: "You 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!"
    2: "My net worth will take over as the "insurance" payout if something unforseen happens - and that includes diability and critical illnesses.Hospital and surgical?"
    Sorry,
    What you said above seems to me you are contradicting yourself.
    I have understood, the more assets a persons has, the more he should use insurance to protect.
    In actual practice, it's not easy to find the asset-protective insurance.
    I had spoken once to an insurance agent, "O.K. I had 1 million $ here. Could you sell me
    a "protective insurance" that can at least return 4% P/A."
    Until today she hasn't get back to me.
    Cheers!

    ReplyDelete
  6. Wow! So serious question; but I like!

    1) Cannot mix-up LIFE and GENERAL insurance OK? It's like girls. Under 16, kena rotan; above 16, boleh (But early marriage... Both sucks!).

    2) When I bought my LIFE insurance, I believed XXX will be enough for my love ones. Now that my net-worth is above XXX, why do I still need my existing LIFE policies? They've served their purpose (I am still here, I won!) OK, I think it is more due to the fact I don't like the way my love ones "smile" at me when pouring my coffee.... (Mummy dearest, I didn't mean you. Honest! All your fault Temperament!!!)

    3) But I still have and will continue to have fire and loss protection for my 3 room HDB and it's contents. That my GENERAL insurance needs. Not to profit from the loss, but to mitigate against it. (Can't get comprehensive car insurance for my imaginary Ferrari though...)

    4) That's the difference between "insurance agent" and TRUE independant financial advisers. I not CFA, so don't listen to me ;)

    If it's $1 million cash, just look for a private banker (your qualify as a high net worth customer. Lucky you!) and they can offer structured notes with capital protection and interest yield. (Just be sure not to get too distracted by the tight skirt and heels - don't pretend! Your insurance agent is a she right?).

    If it's $1 million house, buy a fire and disaster protection (don't assume no flood in Singapore OK?), and rent it out? (You stay where? How should I know! Don't get any ideas trying to stay with me.)

    So it's back to being clear what you NEED first.

    Ha ha!
    SMOL

    P.S. I bet your insurance agent will offer either investment linked or endowment policies to you - especially the one lump sum payment kind :) $1 million lump sum payment; that's a lot of commission! I wonder why she no sense of urgency? Other CFAs reading this post, QUICK!

    ReplyDelete
  7. Ha! Ha!
    Always very funny eh?
    I like also.
    I see you are so much loaded with moola that you want to self- insured your life.
    But they say you really start to make money with your whole-life insurance policy when it reaches it's break-even point. If it's true, I like(salivating now).
    May be we can do some trading; I mean your whole-life policy lah, not you lah, goondo.
    Ha! Ha!

    P/S:
    It's because I told her(she's very pretty hoh, you see her you like her o. k.; for your eyes only.) even I closed my eyes putting $1 miilion into "SMRT" with the lowest dividend yield now at 4 % P/A, do you think "SMRT" will go bankrupt? She did not answer.

    If you can answer for her, I will tell her. I will tell her to be your friend, promise.
    Ha! Ha!

    ReplyDelete
  8. Yes this debate will never end. Different people do have different choices. Some may do find term is best while other thinks that whole will solve their problem. Its because of different needs and the will to spend money. I agree with term policy as it charges less than the whole.

    ReplyDelete
  9. Happen to be trying to find this and learned a lot more than expected post. Thanks.

    Whole Life Insurance

    ReplyDelete
  10. One of the best moments in life is to see a smile on your loved ones face and every responsible person can do anything to keep that going. However, it is not always the case because life is full of vicissitudes. Man is so uncertain of his life that anyone can leave this world any time; there are no guarantees to this. One thing that has guarantee and which surely has a long-term impact is a person opting for a life insurance plan for his family. There is most of reasonable life insurance for parents and children separately as well. That is how all their financial matters handled after he is gone.

    ReplyDelete
  11. Hello Adam,

    You are really into Affiliated Marketing! All your blogs and posts have links leading to some on-line sales sites ;)

    Even your comment to my post has one!

    LOL!

    Well, we all have to make a living ;)

    All the best to your internet business!

    Cheers from ex-saleman

    ReplyDelete
  12. Whole life insurance would be perfect for those who can afford a higher premium and want to avail of guaranteed death benefits and cash values. However if you're young, have a limited budget and only looking for temporary protection then term life insurance is probably best for you.

    ReplyDelete
    Replies
    1. Hi Laura from South Africa,

      It's cool to have an on-line business of your own. Congratulations!

      I fully agree with you if we have limited funds, term is great for getting maximum bang for the buck.

      But as you are well aware, unless agents have a low cost and scalable model like yours, most agents can't survive on term policies under the commission model.

      On a fee-based model, most potential clients with limited budgets will be priced out of the market...

      It's back to the adage:

      No one looks after your interests better than you yourself!

      Delete
  13. Coincidentally i have been having thoughts of surrendering my Insurance policies when they hit 20th years as well. The amount insured is well below my Net Worth and my dependents do not need me to continue those policies either.

    Wandering how much will it really be on the non-guaranteed portion. :)

    ReplyDelete
    Replies
    1. Cory,

      Just give a call to your insurer or do it on-line for the latest cash value accrued.

      My 20th anniversary is 2 years from now at 47. But I think I may need another 1 to 2 years more to break-even with the diminished returns for the last few years... :(

      I guess we both have out-lived the need for Life insurance :)

      Most people don't review the reasons WHY they bought Life insurance in the first place. Insurers thrive on this fear of not having "enough" ;)

      Delete

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