Dear Mr Tan,
My posting on theonlinecitizen gave an example of a Vivolife policy, where premium is payable for 10 yrs (not 20 yrs as mentioned by you) but the coverage is for whole life.
Here are the details you requested:
Age 30 male (non-smoker).
Premium for a $100,000 Vivolife-10 yr premium term. Premium is $4251.75 a yr.
Total premium paid for 10 yrs is $42518. The cash value continues to grow even though premium is stopped.
At age 60 (that is, after the policy is inforce for 30 yrs), the cash value is $99306. If the policyholder surrenders the policy, he gets $99,306 (capital gain of $56788). Using a financial calculator, the yield is 4%p.a. This is similar to the coupon rate of long term government bonds.
Where can you find a zero coupon bond that allows you to pay in installments (instead of upfront) and yet offers you insurance coverage, as well as the flexibility to cash out and get a FULL refund + interests?
My investment savvy clients are familiar with asset allocation and they prefer to include Vivolife in part of their bond portfolio.
They classify Vivolife as an appreciating asset and Term policy is an expense. My clients are covered with both term and whole life policies.
Catherine Choong
REPLY
Dear Catherine
I calculate the yield on this policy, kept for 30 years, to be about 3.5% p.a. (and not 4%).
Can you give the following figures from your Benefit Illustration, i.e. total premiums paid, cash value (guaranteed, non guaranteed), effect of deduction for 10, 20, and 30 years.
I understand that a large portion of the yield at the end of 30 years depends on non-gauranteed terminal bonuses. There is a high degree of uncertainty, as the terminal bonuses could be removed during bad years (and this has happened with other insurance companies). I suspect also, that the yields during the earlier durations could be negative.
If the policyholder invest the premium in an investment fund to earn a net yield of 4.5% p.a. the total amount at the end of 30 years is $132,000 (i.e. 33% higher than $99,306). As he is investing for 30 years, he can choose a higher risk profile and invest in equities. If he earns a net yield of 6%, he will get $191,000 at the end of 30 years.
The cost of providing the insurance protection has to be paid out of the savings, so the estimated return in 30 years could be lower than the gross figures of $132,000 and $191,000 by 10% to 15% (my estimate, depending on the cost of the protection).
If the policyholder choose an investment fund, there is flexibility to continue the saving beyond 10 years, instead of having to buy another high cost product. He can also discontinue saving for some years, without suffering any penalty.
In spite of my comments, I recognise that the non-savvy policyholders may find the packaging of Vivolife to be more suitable to their needs. A good adviser will present both options for the customer to choose.
Mr Tan,
ReplyDeleteI fully agree with you that a good advisor will present both options for the clients to choose.
I usually present a number of combinations for clients to choose and I write the rationale behind each options. Many years before the “ ILP Time Bomb” saga, I have already put it down in writing (under “Remarks” column of the insurance summary table I prepared for my clients) that the policy will expire worthless if the investment units are unable to sustain and the strategies to prevent this from happening.
When I was a new adviser, I was quick to recognise the value of term policies. I also noticed that premiums for certain riders attached to life policies were higher stand-alone policies, for eg, Personal accidents, Hospital Income (under Family Insurance- Hospital Benefit rider). My clients saved premiums and were very appreciative of my value-added advice. I do include term policies in my recommendations and also encouraged many of my clients to sign up for SAFRA Living policy and POGIS.
However, after over 10 years in the insurance industry and growing along with my clients, there are several observations I made. Please pardon me if I sound a little impolite here. The experience I gained from the field maybe very different from yours. Being a CEO , the people you meet with and deal with will somewhat be different from my clients who comes mostly from the main stream.
The following are some observation on human dynamics:
1. People generally like to buy “an asset”, not spend on an expense. If given a choice, most people will not buy a motor insurance. As such, the Govt has to resort to making people renew their motor insurance first before they can renew their road tax. Another example is the Mortgage Protection Policy, get insured before you can take up a HDB loan.
It could possibly be the kiasu mentality that at the end of the day, they want to get to see their money.
As such, many people lapse their term policies after a while. When I asked them why they didn’t renew, they gave the reason as “waste money”. But they see the value in whole life policy and continue to keep them.
2. People tend to have “short term” memory –they forget the reasons why they bought the Term policy (for higher coverage using lower premium). But with each passing years and with an increasing expenditure, their priority is on their immediate pressing needs like school fees, car expenses or even holidays. So many do lapse their term because people can’t see the value of the policy as long as they are alive.
3. There are still many people who think that bad things happen only to other people. MOH revealed that there are many Singaporeans without any medical insurance. So for them, term is definitely out but whole life is acceptable as a form of long term savings (insurance coverage is just an added benefit) They want to get to see money at the end of the day. Some of my clients’ Structured Deposits are currently valued below the original capital, but they say they don’t mind as long as they get back their capital.
4. With regards to investments- many people cut their profits and let their losses run. When their unit trusts, ILP or shares made a little money, some cash out to take profit. But when the market plunges, many cling on, hoping to see day light soon. For some, their investments picked up, but some are still clinging on to their technology unit trusts, hopping to see the market swing 80% up to breakeven. Your ideal is to invest regularly over the long term. Mathematically, you are correct but human reactions are unpredictable. Are people disciplined enough to let their investments grow over the long term? Sometimes greed can make a person irrational.
5. People love to find a scapegoat to blame. When the investments you recommended are growing well, all is quiet. When market is down and if the unit trusts or ILP has dropped in value, clients blame you for recommending them this investment. In 1996, 2001, 2002, the economy was really bad. NTUC Income’s bonus cuts were very steeply. We had to put up with angry clients who were faced with a double whammy of poor investment performance and bonus cuts.
6. With a hectic pace of life here, some people are too busy to realized that their policy had lapsed. They forgot to inform their insurer when they shifted, when they were posted overseas, when they changed bank accounts and so on. For whole life policy, the automatic premium loan is activated (if there is cash value in policy) but the term policy cannot be reinstated. Even several civil servants covered under POGIS lapsed their policies when they went on no-pay leave (eg. for overseas studies, maternity leave, or get a change in postings). The cost of losing one’s insurance coverage is inevitable greater than the premium saved by buying a low cost policy, especially if one is no longer insurable.
Mr Tan, I understand your passion in advocating term policy and investments. I was once a strong advocator myself until I realized that not everyone holds the same values as me. People are dynamic and react differently. So it is wiser to give all the available options and the clients make and informed decision.
Regards
Catherine Choong