You want your loved ones to be taken care of in case anything untoward happens to you. But buying life insurance is not that simple. Expensive may not be better. Cheap may come with complications.
Does it make sense for you to pay nearly $1,900 a year in premiums for a life insurance policy when there is an alternative costing just $332 a year? Many insurance advisers want you to pay the higher sum for a whole life policy.
But Mr Christopher Tan, chairman and chief executive of financial advisory firm Providend, says: Don't buy it. Buy a term policy instead. His advice not only goes against the grain but surprises because he is a former Prudential Assurance agent who used to earn more than $200,000 a year in commissions from products such as whole life policies.
He started Providend last year, making it the first such Singapore firm to charge clients a flat fee for advice, instead of getting commissions for financial products it sells. If advisers earn commissions, he says, they are tempted to push products which yield higher commissions, as is the case with whole life policies.
That motivation has also been evident in unscrupulous practices highlighted in the media in recent months, such as insurance agents and financial planners persuading clients to sell unit trusts and switch to new ones for no good reason.
Comparing Policies
(Assume a 35-year-old man, non-smoker, and $100,000 cover for death and total and permanent disability)
Whole life (participating)
Annual Premium: $1,881
Returns at age 60: $57,485* (Cash value of policy)
Insurance payout in event of claim: $100,000 + bonus
Whole life (non-participating)
Annual Premium: $1,097
Returns at age 60: $34,493* (Cash value of policy)
Insurance payout in event of claim: $100,000
Term coverage until age 60
Annual Premium: $332
Returns at age 60: $77,626** (Return on investment)
Insurance payout in event of claim: $100,000
* Cash value of whole life policy if it is surrendered.
** Assumes return on investment at 5 per cent a year.
NOTE: According to industry sources, the first-year commission for agents for the above policies are around $1,700 and $300 respectively.
'By removing commissions from advice, I can really be free from temptations that may hurt my clients. I am thankful that I realised it early and that I have the courage to be honest with myself,' says Mr Tan, 34. The topic he has brought up - term versus whole life - is not new but he made many people sit up with his no-holds-barred views in a recent article in The Business Times. 'Let me confess to you the false teachings that I used to believe in,' he says.
To start at the beginning, you should know that both types of insurance policies have the same aim: to insure your life and ensure your loved ones get a lump sum if you die. Their premiums are vastly different because with a whole life policy part of your money gets invested, which is why you can get back a lump sum many years later.
In the case of a term policy, the premium is solely for insurance and you will not back get a single cent if the term ends without a death claim being made on the policy.
Another key difference: A whole life policy is meant to cover you for life while a term policy is for a specific number of years. In a whole life policy, you will get bonuses from the insurer if its investments using your money perform.
Mr Tan notes the following arguments for whole life plans:
- Whole life is a systematic way to save and gives you better returns than bank deposits.
- Because of the cash values accumulated in a whole life plan, when you cannot pay the premiums, the policy will not lapse.
- Don't buy term plans because if there are no claims, you get nothing.
- Don't buy term plans because they don't cover your entire life and you never know when you will be hit with an unfortunate event.
'Unfortunately, I have to say that these are all false teachings that will disadvantage you if you believe them,' says Mr Tan, who has a master's degree in business administration, a bachelor's degree in financial services and Certified Financial Planner accreditation. 'For a start, to use a whole life plan as an alternative to savings in the bank is to commit a fundamental error.'
'Bank deposits are short-term instruments that are liquid and flexible. Insurance is a long-term instrument that is not very liquid and flexible. If you need money suddenly, surrendering your policy usually means losing your capital.'
He says you can easily replicate the whole life plan by buying term plans for protection and investing the rest yourself. 'A recent study by Providend showed that in fact, it might be better doing just that.'
What if you are not a savvy investor? You can simply invest in a balanced fund, which is made up of bonds and stocks, or buy Singapore government bonds, Mr Tan says.
Assuming that the return on your investment is 5 per cent a year, the total 'sum assured' and 'surrender value' of the term plan is generally close to, and most of the time, better than that of whole life plans.
If the return on investment is 7 per cent, the total 'sum assured' and 'surrender value' of the term plan will beat those of whole life insurance throughout the period of cover.
Surrender value is the value of the investments at the point of their sale. For term plans, total sum assured is the value of the investments plus the $100,000 cover.
Mr Tan makes one other point to The Sunday Times on why term policies are the way to go. If you want to provide $3,000 per month for your family for 20 years in the event of your death, you will need about $600,000 cover.
If you are a 35-year-old male and non-smoker, you would have to pay $10,986 per year for a whole life (participating) policy, or $6,222 for a whole life (non-participating) one. In contrast, the premium is just $1,605 for a term policy.
In participating policies, you get bonuses from investment gains. That is not the case in non-participating policies. 'How many people can afford the kind of premiums charged in whole life policies? No wonder Singaporeans are under-insured! By using term, everyone can be covered effectively,' he says.
United States personal finance guru, Ms Suze Orman, strongly supports the idea of term insurance vis-a-vis whole life. In an interview last year with O, Oprah Winfrey's magazine, Ms Orman said: 'Keep it simple and buy term insurance; it's good only for a specific number of years and then expires.
'That's okay - life insurance wasn't meant to be permanent; it's there to protect your family before you've had a chance to accumulate enough funds through investments and
savings to do so.'
1 comment:
This is a great sharing. However, I believe it's base on client needs. Buy term and invest the rest strategy can't be suitable for every situation. According to example term plan terminate it's coverage at 60 and your investment return gave only 77k. If he has to use that return for coverage, he's covered less than whole life plan. What about the fact of increasing medical cost over years? secondly I don't agree on the idea that people need coverage only to support his family. Is it wise to use his saving to cover medical cost. I'm sure no matter what if you are down with critical the medical cost will be high and your saving will be exhausted.
That's why when we proposed our client whole life we added term to provide high coverage for the specific time to minimise it's cost.
Unit Link plan are true that you have to pay for your mortality charges. But for people who doesn't know anything about investment. it still offers far better return than putting in the bank.
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