Here is a hypothetical example (to illustrate the concept). You can use the actual figures relevant to your age.
Suppose you have to pay $3,000 a year ($250 a month) to get a critical illness policy covering $100,000. If you decide to take the risk on your own and to invest the annual savings of $3,000 to earn just 3% per annum. The savings will accumulate to $113,000 at the end of 25 years. The accumulate savings will be more than the amount payable under the critical illness policy!
You can buy term insurance (including cover for critical illness) for 25 years for a small premium. Actually, you only need a decreasing cover, as the reduction in each year is compensated by your annual savings. The cost of this cover can be quite low, probably around 5% of the premium. See this FAQ for indicative rates. (You have to take one-third of the rates for $100,000 cover and increase it by 50% to 100% to include critical illness.)
The premium that you put in a critical illness policy will also have a cash value. You have to find out the cash value at the end of 25 years and compare it with the amount that you can get by investing on your own. If the difference is small, it is all right to buy the critical illness policy. If the cash value is significantly lower, than it is better to avoid the critical illness policy.
If you are younger, you may pay a lower premium for the critical illness policy, but if you extend the calculation to a longer period (say 35 years), you will get the same conclusion, i.e. that you will be able to accumulate sufficient savings to get the full sum assured.
I have given hypothetical figures to illustrate the approach can consumers can take to make the right choice. You may need to find an adviser who is willing to give you the advice for a time-based fee, so that you get impartial advice.
To recap: Consider the approach of "buy term and invest the difference". Get the figures relevant to your actual situation. Find an adviser who is willing to give you impartial advice for a fee.
Tan Kin Lian
Tan Kin Lian
20 comments:
Put money into good use.
Be prepare for second wave of econ downturn.
hello and good morning,
just a little comment on para.3.. you implicated that the $100,000 cover from premium of $3000 is not quite worth it since by doing your own investmnet you get $113,000 perhaps much more after 25 years anyway. I totally agree with you that you can get much better coverage by buying Term insurance as you futher enumerated in the other para's of your post.
However it would be perhaps more fair or complete, to stress in para 3 the major assumption, that is, you remain fit for 25 years.
What i am trying to say is that the 3000 example shows that it is not worth it, NOT because of the comparison with investing in other instruments, but more so, because the Term insurance overall is cheaper as clearly explained further down the post.
REX
The buy-term-invest-the-rest assumes that the policyholder invests the "rest" which often is spent away or not invested at all. The theory is good but in reality most people either
(1) Spent the savings away or
(2) Invest in hot funds/toxic assets and speculative investments such as CFD, FX, land banking and scams.
You just need to look at way what happened when we had a major crisis last year. Many people cash out of their investment when market was at the lowest point. They missed out a huge bull run later that.
I just met a client who instructed her agent to cash out of her single premium ILPs in March 2009 this year. I checked - it was the LOWEST point over the 1 year period. She missed 77% of the subsequent appreciation if she would to stay invested.
I am prepared to recommend buy-term-invest-the-rest strategy provided the policyholder is capable of investing the rest properly. If the client is not capable, as a financial planner, I am willing to help such a person to invest prudently provided I am paid to do so on an on-going basis. However, as everybody know, Singapore people wants the free ride and not willing to pay for such service. Therefore, even capable financial planners will NOT want to help such a person invest the rest properly.
A Financial Planner
Financial Planner,
you are supposed to be the financial coach. you don't leave your clients to invest on their own. You help them with the discipline.
Let me tell you the fate of all wholelife products.
First 2 years, as many 60% lapsed. First 7 years as many 80% gone due to many reasons. By the 20 years only 5 % left and beyond the age 60 only 0.5% crossed the finishing line and make claims. So much hype about whole life being good for wholelife by insurance agents.
Let me tell you about wholelife.Did you know why they are called permanent insurance? AH, they are permanent source of revenue for the company, guaranteed.Even if a policy is on APL, the money continues to flow in and better still another stream flows in in the form of interest earned from the APL.
Separate your protection and saving and use the BTITR startegy with the help of a qualified and honest financial planner.
Use an insurance agent, you are finished from the start.
My advice is to start buying critical illness insurance when young. As we age, we may develop symptoms that we are no longer insurable, by then even if we may have money to pay premiums, no company will be willing to insure us.
To anonymous 9:57am,
you are supposed to be the financial coach. you don't leave your clients to invest on their own. You help them with the discipline.
I help clients on an on-going basis on their investments for long-term if they are willing to pay for fee. To be a financial coach, the coach need to be paid. No football coach, tennis coach and financial coach works for free for life.
What i am saying is this - if the client does not know how to invest and yet does not wish to obtain professional help to invest - the buy term invest the rest will not work.
The bottomline - consumers must not expect people to work for free.
A Financial Planner
Insurability seems to be popular with insurance agents. It is bogeyman used by agents to frighten people into buying CI and wasted the necessary resources that are meant for the priorities. Yes buy CI, after all the first thing first has been addressed then the CIs for the young and medical.. Look at it from an honest and INFORMED perspective and NOT emotion and ignorance.
I disagree with buying of 25 year term insurance. Instead people should consider buying renewable 5-year term insurance.
For a 25-year term insurance, you are essentially paying for future premium increases today (so that the premium stays level over the next 25 years). What if your plans change in the next ten years and say by Year 10, you don't need the insurance any more. You would then have paid part of the higher premiums for the future over the past ten years. Hence, a 5-year renewable term (without proof of insurability on renewal) is a far better option. You can, as Mr Tan suggests, invest the difference in premium between the 5-year and 25-year term (which would be very substantial in the first 15 years).
REX comments as follows
I don;t follow the logic of anon. 3:03. How does one know that "you don't need the insurance any more" unless one knows that one will not die within that term of the insurance?
Secondly, you suggested renewing the term insurance every 5 years. After 5 years, you have to pay a higher premium so you are no better off had you opted for a longer term originally! So one might as well stick with a flat 25 years, less headache. We don;t like to talk about diesease and death things all the time every 5 years right?.
Another important point: if i am not wrong, if you bought a 5 year policy, and you want another 5 years extension after the first 5 is up, the insurance co. will not grant you automatically, so what you mentioned above does not exist i think. Who is to say you didnt get a disease during each of the rolling 5 years as you get older and older?
What i know is that, while you are healthy, if you start a 25 year Term plan, the insurance co. will allow you to continue guaranteeing you even if you get cancer on the 5th year, or tomorrow. So, taking note of our mortality, it is safer to buy 25 year term - at the level within your budget and choosing the best offer of course, not endowment and other silly policies.
REX
Anon 3.03PM,
Absolutely true. This the BEST to address risk, one step at a time. Low premium ,huge coverage this is what MOST FAMILIES NEED and not wholelife with low ccoverage and pay through your nose or arse. The premium is ONLY 1/10 of the whoelife premium. Invest the difference.
EG.For a 200K living coverage for 35 year old female the premium is $40 monthly compared to a 10 year limited payment the premium is $500+.
Difference of $460 invest for 20 years at 6% return you get $200K ....less $10K for premium .
Inusrance agents are cheats..
First, I think that we must understand what's the difference between a regular life policy and a critical illness policy.
A life policy usually pays out upon death or commonly accepted definition of permanent total disability (loss of use of two limbs etc. quite a lengthy list).
A critical illness policy is actuarially based on a life policy but with provision for "accelerated" claim, i.e. before death or disability, if diagnosed with one of the listed critical illnesses (usually a list of about 30) the policy becomes claimable.
But of course, with additional benefits come additional premiums, which will reduce overall returns if the policyholder survives healthily till the inevitable natural death.
One thing to note, and one thing many policyholders misunderstand, is that a critical illness policy is not the same as Medishield or other hospitalisation policies. It pays a fixed sum assured (plus bonuses, if any) according to premium and policy size, regardless of how much hospital expenses are incurred. MediShield or hospitalisation policies pay out based on the claimable expenses incurred.
Another problem with critical illness policy is the beneficiary. If you buy a critical illness policy and nominate your wife (or father or mother or brother or sister or son or daughter) as beneficiary, they collect the claim and whether she wants to want use the proceeds to pay to cure you is up to them. The one who collects on a critical illness policy claim has no liability to any medical bill.
Happily, the law was changed recently. A policyholder can make a trust (irrevocable) nomination or irrecovable nomination. Previously, only NTUC Income as a cooperative could offer revocable nomination. I'm sure Mr. Tan knows that better than me. ;)
REX,
you are behind time and you are NOT a financial planner. See post 7:42PM and you will understand how it works and it is the best way to address risk or needs in your early years. You can get enough coverage at lowest cost and invest the rest and get the best return at the lowest risk.
This policy comes with a GUARANTEED renewalbility regardless of health status. Understand now?
I made the comments at 3:03.
What you are doing by buying a 25 year level term insurance is to pay for future premium increases today. The insurance company takes the total of all expected future premiums and then divides it out (with a discount for the time value of money) so that you will pay a level premium over the next 25 years - in effect you are pay for future premium increases today.
What if say in 10-years time, you have accumulated enough money and decide that you no longer need the cover. Or what if you think that the critical illness cover is not what you want and you want to switch to something else. If you do that, you would have paid for the future premiums without benefiting from it.
I believe that almost all insurers offer 5-year renewable term insurance policies which can be rolled forward every 5 years (with increase in premium obviously) without proof of insurability / underwriting. Obviously the rolling forward stops at 60 or 65 in the same way as normal term insurance.
Only caveat to this comment is that if claims experience deteriorate from the current situation (e.g. say suddenly lots of people claim on their critical illness policy), when you renew the policy, your premiums may be much higher than if you had bought 25-year level term.
i refer to the comments under the title "make a balanced decision" by Mr Tan and i really need serious help! the more i read the blog after that title onwards, the more i am seriously confused!! i thought insurance was easy but it seems not! LOL
(for Anonymous which left a comment for "make a balanced decision" on sept 18, 4.01 am) hey Anonymous how much are you paying per month and how much is ur coverage for your ILP? is ur 150k expenses for ur mom includes hospitalisation bills or not? so are they subsidised?? Mr Tan and fellow Singaporeans hope you can help me. i am confused.
can anybody hopefully including Mr Tan explain what is reinstatement option in ILP? also what is the dynamic mortality charge in ILP? is it really cheaper and more cost effective for ILP in the long term based on coverage? my adviser did not tell me at all about this 2 terms if they really exist. and lastly what is the "holiday" thingy you are talking about??? can go ask ur adviser? he just explained briefly and passed me all the quotes after a torturous financial planning session.
i see the importance of getting a critical illness plan but now pondering should i consider covering till only about 60 or whole life. I am a sole bread winner and have 3 kids and thus both insurance coverage and cost effectiveness means alot to me.
i have a few term different company quotes and a single ILP quote from a friend in IFA and as it seems, the longer duration i want to cover, the more expensive the premiums are and i am really confused. for the cheapest term plans, if i want to cover myself till 61, i have to pay $118 monthly for 200k coverage. it is not exactly cheap. if till i am 71 and 81 respectively, it is $161 and $225 monthly respectively! any advice which 1 sld i get? or sld i just get an ILP at $220 monthly for a 200k critical illness coverage plus 120k death? i am seriously confused and i need help! hopefully Mr Tan can give some insight here.
oh btw David(from the other post) why are you not responding? hopefully you are not banned for being to differing or something? LOL.. it will also be interesting to hear your views. i do see sense in your argument though but Mr Tan's one also make sense in his own rights. anyway sorry yeah i agree Mr Tan deserves better respect.
any help or clarification is much needed! thanks!!
regards,
Mr Confused
The dynamic mortality charge they are talking about, refers to the cost of the "insurance coverage" in your Regular Premium ILP. It is an "ever-increasing" factor, when calculating the cost of insuring $200K (Death and CI), for as long as the policy is intact.
Just check your policy document, where there are tables showing the pricing/costs for Death or Critical Illness (CI) coverage at different ages.
Say when you are at age 65, look at the figures shown at Age 65 on the table and multiply it by the amount you are insured and that will be how much it costs, for your insurance coverage(mortality charge) for just that particular year. Both tables for Death & CI coverage usually independent.
Be prepared for premiums amounting to a couple of thousand dollars a year, for $200K Death & CI.
In a standard term policy, the premiums increase according to your age, at every juncture of renewal. This is seldom sold standalone now except when packaged investment-linked regular premium policies.
Most term policies are sold as level terms, i.e. the term and the premium and the sum assured are agreed upon and cannot increase or decrease throughout the term.
Question is, why is level term not used with regular premium ILP? Answer is, level term is more expensive in terms of insurance mortality charges in the earlier years of the policy. In order to afford to pay more attractive commision and incentives to agents, the standard term is preferred by insurance companies for regular premium ILP.
So, how's the client affected? Because regular premium ILP is based on standard term instead of level term premium, the agent gets more commission and incentives as the insurance company could afford the excess by contractually not required to allocate fund units to the policies.
After the first few years when commission entitlement runs out and full unit allocation sets in contractually, the client foots the bill of higher and higher mortality charges, still eating into their policy values.
Mr Tan,
What are your views on the Jade Global Universal Life plan from a financial institution?
Someone who is age 43 pays an upfront premium of US$140,000. Upon her death, the beneficiary will receive US$1 million payout.
My friend's banker told her about this product. The return is almost 8 times. It sounds too good to be true.
How is it viable for the company?
CC
Can anyone recommend an Insurance Company that provides a Good term policy for Critical Illness?
I recently did the study for ILP to cover Critical Illness, the mortality charges will be high and over takes the premium around age 60 +. The company may at their own discretion, increases the mortality charge table. Another options I have explored is the 15/20 yrs Limited Policy which I need to pay for 15/20 yrs. The premium is kind of high and I don't like the idea of having to lock myself paying such a high premium for long period. But the return would be good and I don't have to worry after making all the payment. All I can see is that there is a Pro and Con for each type of policies. What surprises me though is that the SAF Group Insurance which I can purchase for the Critical Illness (is a term policy which end at age 65), has a higher premium than ILP. I'm more convince to purchase the term Critical Illness provided the premium is reasonable. Thanks...KM
Investing for long term gain is a totally different financial planning tool to insurance. Paying premium into a critical illness policy or life policy cannot be compared to an investment plan. The writer should not mix the two and challenge the public to buy one of the two.
Insurance is for those who need money NOW in the event of a critical illness or death, so for $250 a month the policyholder gets $100,000 protection. This is NOT an investment, it is financial protection for the family.
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