Dear Mr Tan,
I've been following your blog and understood your point is there's no need to insure myself beyond 65yrs old, since there's not much income to be insured against. My agent sent me this benefit illustration when I asked for a $1M term life coverage to 100 years old.
I'm currently 34, assuming I die at 100 yrs old, I'll have to pay premiums for (66 x 3,940 = $260,040) That's the maximum premium payable. But my coverage will be $1,000,000, and I can't imagine I'll live beyond 100 years old. Even our statistics shows, men's expectancy is only up to 79years old. So a payout is almost guaranteed.
Isn't this too good to be true? Apart from the fact that I won't get to use this $1M, it'll be a pot of money for my loved ones. How does the insurance companies make money from these?
REPLY
Based on your calculation (and I can see no fault in it), the policy does look attractive. The possible catch is:
a) There is no cash value. If you discontinue the policy at any time in the future, you will lose the excess premiums that have been paid (i.e the difference between insuring up to age 65 and 100).
b) There is the risk that you may overlook to pay the premium and the policy is cancelled. The insurance company may refuse to reinstate your policy even if you opt to pay back the arrears in premium. I do not know what are your reinstatement rights
c) If you live beyond age 100, you will lose all of the premiums that you have paid.
Based on SAF group insurance, you only need to pay $1,540 a year for $1 million of cover up to age 65.
Based on SAF group insurance, you only need to pay $1,540 a year for $1 million of cover up to age 65.
7 comments:
With long term inflation rate of 3% per annum, that $1M payout your descendants will get in 66 yrs is equivalent to only present value of $142,149.
If the insurance company can invest the yearly insurance premiums in a globally diversified portfolio, then a reasonable long-term return will be 6%pa. But that still means the insurer can only "break even" after 48 yrs --- in the worse case event of claim. That means if you don't kick the bucket before 82 yrs old, the insurer earns more than it loses.
But of course no insurance company operates like that. For a large sum assured of $1M, it will re-insure with other companies like Swiss Re, Munich Re and Sing Re, so that the risk is spread out. In this case, the break even for worse case of claim can be lowered to 20 yrs or less. I.E. The insurer and re-insurers counting on the fact that you making a life claim before 54 yrs old is remote, and so they maximise their profits.
Rex comments as follows,
I am not sure if forgoing $260,000 to allow your dependents to claim 1,000,000 on your death, is a good deal or not. (exception: if you die young then no doubt it is a good deal because the total premium paid is just a small fraction of $260,000)
There are 2 cases:
1. Let's say in your career you end up rather miserably, salary worker not so high pay all the way to retirement. With the high cost of living, why would you want to forgo $260,000 through the annual premium deductions? Should you not be using it to improve your standard of living and make ends meet?
2. Let's say in your career you are quite successful and your business flourishes. In that case what's the point of wanting for the death benefit of $1 million, since you are already a successful in your business and not hardup for a million dollars? And if you are successful in your business, for sure you know better ways to churn your $260,000 to make profits even better than $1 million, yes?
So in either cases, it is quite unnecessary to insure all the way to 100 years old to $1 million, in my opinion.
A cheaper term insurance up to about 70 years i think will be a reasonable balanced way to manage the money and you still get to enjoy much of the $260,000 while you are still alive.
rex
Mr Tan,
as far as I understand, you can only purchase a maximum of $450,000 from the SAF Group Insurance, ie. $300,000 Term & $150,000 CI Term.
Sensible arguements from Rex & Spur.
Thank you all for sharing your thoughts.
Great insight from Spur!
Rex, I'd like to paint a 3rd possibility to you; what happens if the insured is total and permanently disabled? It'll be to our advantage to insure against the remote and highest cost isn't it? I'm too pessimistic?
SAF Group Term Life (SAFGTL) is not as good because there's a "group risk limitation" Say there's a mob and the bus you're on to the camp overturn, together with you there's other 19 people on the bus also on the same SAFGTL plan. Each will have a max payout of $500k.
rex comments as follow,
hello wagoner,
well as i mentioned in the "exception" statement, the policy is great if death happens within a few years of policy inception, since your yearly payout would have been low. This also applies to permanent disability too, yes? The rest of my argument is as before, as in case 1 and case 2.
rex
This is pretty interesting insurance riddle !
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