Tuesday, December 07, 2010

Comparing whole life and term insurance

Lorna Tan (Sunday Times Money Page) gave a bad comparison of whole life and term insurance. The whole life policy insuring $500,000 cost nearly $11,000. She said that the term insurance policy (insuring up to age 99) cost $3,300. This is the line of reasoning used by insurance agents, and in a dishonest manner, to get people to buy whole life insurance.

The proper comparison is a 25 year term insurance policy, where the annual premium is $800. The balance of $10,000 can be invested in an indexed fund to earn 4% or more over the next 30 years. It will produce an accumulated savings of more than $500,000. By that time, there is no need for life insurance - as the accumulated savings is more than the sum assured!

By buying a whole life policy, the consumer will have a cash value that is 40% to 50% less than the accumulated savings. Why give so much of the savings away in a whole life policy?

Tan Kin Lian


zhummmeng said...

The assumption is that WL is kept till 100 years old which is NEVER generally kept beyond 65.
Lorna didn't factor in the loss due to mortality charge which increases EXPONENTIALLY AFTER AGE 65. In other words by 100 years old there might be NO cash value left or the return is NEGATIVE because the mortality cost eats up ALL the cash value.
How many people can afford $500K worth of WL and keep beyond 65?
Statistically and NOT theoretically, only one out of 200 keeps a WL beyond age 65 and last till 75 and NONE till 100.
Lorna might as well say there is no term product that covers beyond 100 or 200 years old, right. WL in theory can.This line of argument is false because the scenario CANNOT happen. Currently there are only 3 known people in the world who are living past 100 years and out of 8 billion human beings.
Don't be fooled...what is the probability?.
1. very few and they are the rich can afford enough WL to protect fully the risk.
2.the return is negative and many , many many can't afford to save in negative return..Only fools or risk lovers will for negative return.The man in the street definitely cannot afford to.

Lorna is talking about $500K WL. She is talking about the rich....anyway who cares the rich can afford to squander on WL..We are concerned about the average Joe , the man in the street , the working people, the professionals, these people can't squander. For them every dollar has to be stretched, to work very hard.
To compare insurance plan at 100 years old is a an academic exercise at best and sophistry at worse.

Spur said...

Is it such a co-incidence that the explanation and example promoted by a reporter is exactly the same as that used by salesmen/women to push wholelife??

News media have vested interest not to antagonise big advertisers like insurance companies and banks and other financial institutions. There is already a conflict-of-interest paymaster-contractor relationship between these big companies and the news media. Compared to the millions of revenue provided by the big companies to the newspapers etc, the man-in-the-street who pays 80c or $1 to read the newspaper is pure chicken feed and dispensable.

Vincent Sear said...

In traditional whole life and level term, the mortality charges do not increase with age.

In IL whole life and renewable term, then do mortality charges increase with age.

In traditional whole life, the cash value cannot be decreased by increasing mortality charges at older ages. However, it's true that returns are low and upfront costs are high. Further reducing rates of returns in future is not the same as deducting from cash values. It just means cash values accumulates at even slower rates.

In IL whole life, the fund units can be decreased by increasing mortality charges at older ages.

IL whole life is more commonly known as regular premium ILP. If one breaks down its cost structure, it's the most expensive policy around, even more expensive than traditional whole life and endowment. If one really likes an insurance-linked unit fund, buy it through single premium ILP when one has the lump sum, typically a minimum of S$5,000 to start with.

Regular premium ILP is also a disproportionately expensive way to start saving a few hundred dollars a month. Save in a bank until there's a lump sum to invest in a single premium ILP. If insurance protection is of concern, buy a term policy.

zhummmeng said...

Vincent Sear,
i am not picking on you...
Mortality charge in traditional whole life and term insurance increases with age.This is the reason that the return is eaten up and fast during old age.
Both use YRT for mortality charge.
Please find an actuary to confirm for you.
ILP is the MOST transparent and it shows the breakdown. The traditional WLs don't and that is why they cheat by NOT TELLING you. The salesmen even lie to you by telling you premium is the same through out implying that there is no increase in mortality charge.
Vincent, i think you have been cheated by your agent or you don't know that you don't know.
Anohter tip for you.. Regular ILP aka variable whole life is BETTER than the traditional WL if it is properly designed or assembled.
OK, before you accuse me of picking on you check with your actuary friend. Get your facts right.

Unknown said...

Mr Tan,

Inside this article, under the Group term insurance, it stated "the main shortcoming of group term insurance is its renewability as the insurer has the right to cancel the insurance arrangement" How truth is this?

Vincent Sear said...

Zhummmeng, thanks. I do appreciate your friendlier tone in the spirit of discussing, sharing and learning. I only have two actuary friends. One of them none other than the host of this blog.

Their times are precious. I wouldn't bother them with general pros and cons like that. Interestingly, I notice that both come from different angles.

zhummmeng said...

Regular ILPs(aka variable WL) work on the same principles as WL except that ILP are more flexible. You can vary your sum assured and premium. They are more transparent; you know the cost, the mortality charge for each year. The best part of ILP is you can choose the investment vehicle. WL has one size fits all portfolio,ie. everybody's premium is thrown into the same curry pot . There is no regard for individual risk, goal and time horizon.
Regular ILPs perform better than WL in term of return and protection.
The downsides of regular ILPs are they are abused, wrongly sold,too high distribution cost like WL, premium overly stretched for protection.
Having said all this, both regular ILPs and WLs should be avoided. They are useless plans for saving especially WL and protection. For protection ILP is also better than WL.

Vincent Sear said...

Ironically, after many years in the life insurance industry, I felt that's either an artificial or redundant industry, even including term. Products are designed and created to generate sales, not to meet needs.

An "accomplished" agent would not abandon term completely. He should know how to attach a term rider to a whole life sum assured look big enough to justify the premium.

However, they'd still be people willing to pay higher prices for convenience or service. As long as there's no misrepresentation or cheating, the costs are made clear, my take is let it be.

My personal opinion in terms of financial planning is to forego life insurance entirely. The costs saved should easily afford general insurance coverage of accident and medical, the two contingencies most likely to cause death or disability during working age with burden of dependants.

The rest of the savings should be invested directly in stocks and/or unit trusts depending on each individual's risk profile, at very low commission costs.

The trouble with traditional whole life or regular premium ILP, is that insurance-rated (not investment-related) commission is charged on both insurance and investment components of the policy. It's simply silly or wasteful to pay insurance-rated commission on investment.

Blue Bird said...

A lot of insurance types make some confusion to select the appropriate type of insurance that is easy to pay for and most suited, so that is the reason many of us search for affordable term life insurance to get benefit from it's features.

Sakhi Sawant said...

Thank you for sharing such great information.It is informative,can you help me in finding out more detail onTerm Insurance Comparison,i am interested and would like to know more about this field and wanted to understand the basics of Term Insurance Policy

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