Should I buy whole life insurance plans or buy term and invest the rest?

TOO LONG; DIDN’T READ

Whole life insurance
Cover you for life, until 100 years old
Higher premiums
Extremely low coverage
– Has cash value

Term life insurance
Covers until 65/70 years old, although that being said, there are plans out there that cover until 100 years old.
High coverage
Extremely cheap premiums
No cash value
– If policy owner were to buy term and invest the rest, considering that the whole financial ecosystem shares the same interest rates and investment returns, term life insurance gives better returns plus improved coverage.

Watch this video from Dave Ramsey on the difference between Whole Life and Term Insurance:

The truth behind whole life and term life

Many financial advisors or insurance agents may advise their clients to buy whole life insurance plans because of the embedded cash value in them. Is whole life insurance or term life insurance better? In this article, we’ll dive into the specific calculations to find out which type of life insurance is more suitable for you.

Firstly, let’s look at a table from MoneySmart to understand the advantages of both term life and whole life insurance plans.wholelifeVStermlife.JPG

So whole life insurance is more expensive that term insurance, the question is , how much more?
Let’s go to www.comparefirst.sg to take a look at some of the most competitive whole life plans and term life plans in Singapore.

Coverage for whole life and its costing


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wholeLifeInsurance.jpg

Let’s take the plan that has the lowest premiums for comparison.
In order to cover myself for my whole life, I’ve to pay $103,565 for NTUC Income’s Direct-Whole Life plan, for a sum assured of $200,000.

In the 30th year, if I do choose to surrender my plan, I could take back $74,672 assuming that the investment returns is at 3.25% consistently each year.

Effectively, over 30 years, I have paid ($2354 x 30 = $70,620) for my life insurance charges.

Assuming that the participating fund is able to perform at 3.25% consistently each year, I can surrender the policy for $74,672.

So after 30 years, I would have broken even and obtained ($74,672 – $70,620)= $4052. Cool.

And if by some miracle the fund performs at 4.75% each year, I would have a surrender value of $107,064.

So after 30 years, I would have broken even and obtained ($107,064 – $70,620) = $36,444.

 

Coverage for term life and its costing

Now let’s take a look at term plans:
termLifeInsuranceDescription.jpg

termLifeInsurance.jpg

I am paying merely $305 x 30$9150 for 30 years to cover myself for the same amount of $200,000.
Now, remember how I’ve paid  $70,620 for whole life insurance?

Assuming that I’ve taken the difference between what I have paid for whole life and term life insurance to invest, that would have been a potential amount of
$70,620 – $9,150 = $61,470

$61,470 over a span of 30 years that could have been put to better use.
Assuming that I put this money in the safest of instruments possible, giving a 2.48% of investment returns each year, considering that I place the money in  Singapore Savings Bond, which is  $61,470/30 years = $2049 yearly.
SingaporeSavingsBond.jpg
ssb returns
I would have obtained $91,849.48, and after using the $9150 to pay for my term life insurance, I’m left with $82,699.48 as compared to whole life insurance of $36,444 (assuming participating fund returns of 4.75%)

Now, let’s look at fixed deposits.


With a 1.62% interest rate, and placing $2048 every year( which is the amount I saved from buying term life as opposed to whole life), I can obtain $79,583.27 after 30 years, which is significantly more than the whole life’s miserable $36,444 (assuming participating fund returns of 4.75%).

Tell me this, do you hold any insurance policy that you managed to cash out with an investment return of 4.75% each year? Comment below. Let me know.

Singapore Savings Bonds and other safe instruments as a guaranteed form of investment to fight against whole life insurance

Although it is arguable that SSB may not be available for the next 30 years, one could easily argue that I could still place in Fixed Deposits offering decent interest rates. Furthermore, the money isn’t locked up anyway. I could withdraw them whenever I want.

Granted that whole life insurance plans allows me to leave a legacy for my descendants, there is still a lot of potential in the surplus of money I could have used for growing them if I were to purchase term life insurance. At the end of the 30th year, I’ve already a surplus of $91,489.48 which I could have continued to put elsewhere.

In any case, the investment returns from the whole life insurance are also dependent on the economy. All the investment returns share the same financial ecosystem as the interest rates being offered by SSB.

In short, to sum up, these are the comparisons between whole life and term insurance:

Whole life insurance
Cover you for life, until 100 years old
Higher premiums
Extremely low coverage
Term life insurance
Covers until 65/70 years old, although that being said, there are plans out there that cover until 100 years old.
High coverage
Extremely cheap premiums
– If policy owner were to buy term and invest the rest, considering that the whole financial ecosystem shares the same interest rates and investment returns, term life insurance gives better returns plus improved coverage.

Think deeply, the real objective of life insurance coverage

You see, the real objective of life insurance coverage is to provide for your dependents if you are no longer around to provide for them.

So let’s assume you have dependents, you have kids. 25 years down the road, they’ll grow up and be independent. They can provide for themselves. So what’s the point of having whole life insurance to provide that lump sum of coverage after you pass on?

Give a man a fish, you feed him for a day. Teach a man to fish, you feed him for a lifetime.

As a parent, do you want to leave behind a lump sum of money for your kids so that they can enjoy life? Are you really teaching your kids financial literacy? Are they able to sustain that wealth considering that they didn’t make it themselves?

So what do you think?

Is buying whole life or term life insurance better?

You decide.

What do you think?

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