The main reason why you should hate whole life insurance is that IT IS EXPENSIVE.
And we are going into detail in this article, just how expensive it is to buy a whole life insurance plan compared to a term life insurance plan.
For a start, let's compare the real cost of whole life and term life insurance plans.
We will get a whole life that covers the insured for life, and a term life that covers the insured until age 65 (the general ballpoint mark used).
We got the 3 cheapest insurance quotes for each insurance plan from MoneyOwl.
Insured Person Details:
Gender: Male
DOB: 01/01/1995
Smoker: No
Premium Type: Annual
Sum Assured: $300,000
Critical Illness Coverage: Nope
Source: MoneyOwl
Annual Basis
A whole life insurance plan is on average 10x more expensive than a term life insurance plan.
You could save 90% of the premiums by just opting for a term life insurance plan.
Whole Package
If you bought the term life insurance, you would have paid on average a total of about $15,000 in premiums.
If you bought the whole life insurance, you would have paid on average a total of about $110,000 in premiums.
In total, whole life insurance is about 7x more expensive than term life insurance.
Why People Buy Whole Life Insurance?
Most people that I know buy whole life insurance because of the cash bonuses.
After paying years of hefty insurance premiums, we want to see some returns on our money.
By buying whole life insurance, a portion of the premiums is invested in the insurance companies' funds.
These funds, if lucky, could perform extremely well and can sometimes return us more than the premiums we paid.
Under that situation, when we surrender our policy, we can get our money back at a small profit.
This appeals to our un-financially-wise brain.
That's how many of us fall prey to this penny wise, pound foolish mistake.
The returns on dollar terms, in the thousands or hundreds of thousand, may seem like a good return on investment.
But, if calculated on a percentage term, the returns may not look at attractive as they seem.
Maths Of Whole Life Insurance
Let's take the cheapest term life and whole life insurance plans we got from MoneyOwl for comparison.
A term life consists of protection portion only, while a whole life consists of protection and investment portions.
The term life insurance cost $27.35 per month.
The whole life insurance cost $375.00 per month.
$27.35 covers only the protection portion
$375 covers both the investment portion and the protection portion.
From this, we can guess that $375 will be split into $27.35 (protection) and $347.65 (investment).
If you took that $347.65 and invested in the Straits Times Index (ES3.SI) via a Regular Shares Savings plan, it would have grown to $194,000 by the end of the 25 year period.
This is based on the 4.58% growth rate we calculated from our previous article:
Save in CPF or Invest in SPDR STI ETF?
If the whole life insurance's bonus cannot even hit 4.5%, you might as well passively invest it into the stock market.
If you think about it, when the insurance companies invest your premiums, they are going to invest in funds that invest in stocks, bonds, or REITs.
None of these assets you cannot invest in by yourself.
Furthermore, most of these funds are actively managed, which tend to give lousier returns in the long-term than passive investments (aka buy-and-hold stock market indexes).
Conclusion
Buy insurance for protection, not investment.
Get over the mindset that "if I don't get any money back on my policy, I am on the losing end."
Because you are not!
But if you keep wanting to get money back from your insurance plan, you will probably be on the losing end.
Recommended Read: What Happens After I Join A CPF LIFE Plan?
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ReplyDeleteInsurance salesmen & financial advisors will jump in to say it's not apple-to-apple comparison as WL is priced for lifelong coverage, instead of being priced up to 65 y.o. (they will argue you should choose term till 100 y.o. to compare).
But in reality, vast majority of WL policy owners (I will pluck 99% from the air) will surrender once they lose their jobs or retire in their 50s, 60s, 70s. Look around & ask which retirees in their 60s or 70s are still paying or holding on to their WL with surrender values of a few hundred K?? (Any elderly still holding onto their WL are likely having children paying for the premiums --- I know 1 relative like this ... old style WL with premiums till 85 y.o.)
Regarding WL, one KEY factor to know is that limited term premium (e.g. 20 yr or 25 yr) ALWAYS result in MUCH lower returns compared to paying till 65 or 85 y.o. This is becoz a (much) bigger portion of your premium is ringfenced to pay for future insurance coverage when your premium paying term ends --- when you're older & more likely to claim the insurance --- insurance companies & actuaries ain't dummies.
The 2nd thing to note is that insurance Par Funds are only 30% to 35% in equities, with the bulk (~60%) in bonds, and 5%-10% in properties or loans.
With global QE Infinity, bonds are going to be suppressed for a long long time. As for stocks, I think the next 10 years will need to be selective. After the past 10 yrs of "everything up" markets, the next decade will not be the same "close eyes & everything also goes up" market. Equities in (more expensive) growth industries like tech, biotech, AI, e-commerce, digitalisation will likely do better, while those companies that cannot adapt fast enough (including many current blue chips or big companies) will suffer.
Unfortunately, insurance par funds will err on the side of conservatism & hence their 30%-35% equities will likely give a lackluster medium-term returns. This combined with the suppressed bonds will not spell very good returns.
Hi,
DeleteYou raised really good points there.
The limited term premium, the funds' performance, and equally important: people's action in surrendering their policy.
We might write a thing or 2 about it some time in the future!
Cheers! 😁
I think it's totally unfair to take wholelife to compare to Term when u only want death coverage. Despite that both can give you a ECI rider, one that a WL gives is for WL. It protects you from additional cost from illness when you needed it most whereas Term protects you when you least need it, still it is essential to take something for your mortgage coverage for your love ones.
ReplyDeleteIf you want to compare, why not compare a wholelife vs a term till 99 on the same coverage? That will be a fair comparison
ReplyDeleteA very biased view which does not consider the real mechanism of a par fund (not to mention the difference in coverage duration and exact features available). Different plans suit different needs and you are over generalising the approach. I hope you are not affiliated to moneyowl in anyway, this leaves a very bad taste.
ReplyDeletevery biased comparison, term duration and total premium paid in the long term are not taken into consideration. Details of the coverage of each plan is not compared as well. Is the details of the plans compared? It is like comparing a Iphone and a Nokia, asking one to buy one that is cheaper without thinking of their individual pros and cons. both serve the same purpose of calling and texting but the features and durability of each product are so different. Each product has place in the market, as no one is made equal in every circumstance. Such a "surface" comparison serves no benefits to the readers at all.
ReplyDelete