Tan Kin Lian's Blog: High cost of life insurance at older ages

Saturday, October 11, 2008

High cost of life insurance at older ages

Dear Mr. Tan
I attended a briefing session by a Financial Advisory company that talks about some of the pitfalls in investment linked insurance (ILI)

One of it that struck me was the net cash value in the policy will peak at some point and start to drop drastically. There will be a point where the net value is 0.

The reason given was quite logical. Any ILI premium will be split into 2 parts, one for insurance, another for investment.

At the start, when the policyholder is young, premium for insurance is relatively low, and most of the money will be channeled to investment of funds. But as he ages, the insurance premium will increase, and there will be a point where the money accumulated under investement needs to be withdrawn to subsidise this part. The time will come when the money will be depleted.

Question:
Frankly, I don't see a way out of this. Premium for insurance for elderly people will skyrocket. This is inevitable. The outcome seems certain. Whatver accumulated in the earlier years will be used to pay for these premium, unless investment is so successful that the returns are so high year after year (outperform the premium rise rate). And I do think all insurance have the same practice. Otherwise, they won't be able to cope with the cost esp when the national population ages.

Does that mean that whe one ages, perhaps it is better for one to take the chance and close the policy and take back all the money generated, and be without insurance?

What would be your advice?

REPLY

My advice is shown here:
http://www.tankinlian.com/faq/savings.html

Buy a decreasing term assurance for 30 years and invest your savings in a low cost investment fund.

6 comments:

Anonymous said...: ILI should be complemented with a traditional life insurance. ILI should not be seen as a bad insurance product just only because of the high cost when the insured is older. ILI is the only product out there if the insured does not have enough budget, requires a large sum assured and still would like to have some form of cash value.; October 11, 2008 11:33 AM
zhummmeng said...: The traditional wholelife(WL) and the regular ILPs aka variable whielife(VWL) have a few differences.
1.The sum assured of WL is controlled by the insurer whereas for VWL often the customers decide the sum assured and the SA is normally very high. This is the feature of VWL always abused by the agents as a selling point.Eg. a $100 premium can give a 30 year old up to $500K sum assured but the customers are not told that the premiun may NOT sustain the coverage after a certain years. With WL you don't get this coverage. VWL is VERY useful if you know how but as I said the agents are only interested the sale initially and do not disclose the down side or help the customers to adjust the SA like a decreasing term coverage.
2. Both WL and VWL's cost will increase with age. For WL the sum assured is already determined and controlled at the start and surplus premium can grow enough the cover the sum assured and on top of it to give some cash value.But the cash value will also suffer a decline after 65 years old.
3.The difference is WL invests in the same portfolio with the rest of the policyholders.Your risk, objectives, time horizon are NOT considered. It is one size that fits all of you.
With VWL you decide everything from the start. This should give you the best in term of coverage and return. But the problem is the agents are unethical; they don't disclose the pitfalls and they don't care about the interest of the customers like the agents who sell WL products only.
What does it tell us? Often the plan goes awry because of the agents for miss-selling and misrepresentation. The agents are either dishonest or incompetent. This is one good reason why you should NOT choose insurance agents to 'help' you.They don't know how to help. They only know how to sell.
it serves you well to engage a an honest and competent adviser who advises and NOT insurance agents who push products for commission.
The current MINIBOND debacle should serve as a lesson to investors of insurance products and investment that choosing an adviser is very important.; October 11, 2008 11:34 AM
zhummmeng said...: I forgot to qualify my above discourse that both types of insurance, ie. the traditional whole and variable whole life(ILPs) are both rip off products. My discussion is to let readers see the differences and that both are WL except that VWL(ILPs) has some flexibility to adjust the sum assured and also the policyholders can decide the investment asset allocation.
In both cases the cost is too high and therefore affects the sum assured and the return.
Both types the customers have to pay more than 26 months of the premium to pay the agents the commission and profit to the company.This is rotten and this explains why the agents are pushing very hard these products.
With BITR the cost of insurance and investment costs are about 25% of the above and it achieves better result than WL and VWL in term of more coverage and return. You can see the obvious difference in cost. Cost and return are inversely related.
Go for BTITR for peace of mind and wealth accumulation.; October 11, 2008 2:34 PM
Anonymous said...: I cannot quite understand what is happening. According to what is said, by right, the returns will start to diminish the older a person is, but what the illustration in my policy is showing is that the older one is the more returns he will get. So how is it that more is spent on protection and less on investment how come there is more and more returns as one ages?; October 12, 2008 1:44 AM
Anonymous said...: The increase you see is the absolute increase,ie the return peaks at 3% and thereafter starts to decrease . The absolute shows increase but the increase is getting lesser and lesser until an age when the absolute also decreases. Your projection may be illustrated to 70.; October 12, 2008 8:54 AM
Anonymous said...: Don't buy whole life and those regular ILPs. They are rip off products meant to reward the insurance agents with high commission for their ability and skill to con the consumers. These products take away so much of your premium (more than 2 years) that leave little for your saving.The characteristic of this kind of products is low protection and low return and expensive. Many people end up with low protection.
The people who benefit from these products are the company and insurance agents.; October 12, 2008 5:30 PM