We are honored to have an insurance consultant, Hendri, to explain to us the differences between whole life policy and term policy, and the implications that come along with either one of them.
1) Hi Hendri, I noticed there is a school of thought that believes in buying term insurance and investing the amount of premium saved from a whole life policy. Do you think it is advisable?
The answer is yes and no. I will explain ‘no’ first – Buying a life policy is analogous to buying a house. Monthly installment is higher but eventually, you get to own the house and enjoy the potential of value appreciation. On the other hand, buying a term policy is similar to renting a house. You incur a lower monthly expense, but the house can never be yours. Thus, in your opinion, would you buy a house or rent a house? The answer would be obvious, you would not rent a house and invest the rest of your money!
One has to note that term policy covers only up to 75 years and given the fact that people are living older, you would not be covered thereafter. A whole life policy will cover you until age 100. In addition, if you want to invest the rest, not many people can really earn more from their investment.
As for the ‘yes’ part, you can buy a term insurance and invest the rest if you can really get good returns from your investment.
2) Your recommendation is that whole life policy is still a better choice for most people. At what circumstances would you recommend a term policy?
It differs from person to person. That is why financial planners and consultants need to evaluate a client’s situation and needs individually, and come forth with tailored recommendations.
That aside, I would generally recommend a term policy to a client who just started out working whom may not have a high income to purchase a whole life policy with a good coverage. Thus, it would be advisable to buy a term insurance to provide temporary coverage until his/her income increases to allow a switch to a life policy. Alternatively, the client can purchase both together to meet his/her coverage needs. Generally, a person should spend 10-15% of his/her income on insurance (life, term, endowment etc).
3) Any other issues regarding insurance that you would like to highlight to our readers?
I see more clients request to purchase endowment or investment linked policies (ILP). Their intention is that they can gain a higher return from these products. Many roadshows are also pushing such products to passer-bys because it is easier to sell and at the same time, these have higher commissions. Why don’t they recommend medical policies which are much more important given the escalating medical cost in Singapore. If you wonder, medical policies have lower commission rates.
I strongly believe a life policy should be purchased as early as possible as it serves as a foundation block in the client’s financial planning. With a strong foundation, it is then easy and safe to build higher. Endowment policies and ILP can be purchased later and in fact, these policies should not be held for long term. This is because of one important reason – the cost of maintaining the policy increases with increasing time. This would mean that you have less money put into investment and more into sustaining the cost. You can take a look at the hypothetical graph of an ILP – there can be a point where your premium equals the cost:
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{ 16 comments… read them below or add one }
I could not help but noticed how unbalanced Hendri’s reply was to the first question.
Buying a whole life policy or term insurance can never the same as buying or renting a house.
A self owned property when liquidated can be used to effectively buy another home / house albeit smaller and ensure that the need for a roof over one’s head is met. You cannot do that with insurance because of factors like age, sex and even illness that crop up later on in life, one might become “un-insurable”.
To say “On the other hand, buying a term policy is similar to renting a house. You incur a lower monthly expense, but the house can never be yours”, is so wrong coming from a practicing insurance consultant.
Term insurance though cheaper, does its job of providing insurance. You still get paid if you meet the criteria for making claims. The only key difference is that there is no residue value when it matures, hence the lower premiums.
Insurance consultants or agents generally push for ILP or Whole Life Policies because they carry higher commissions.
Another misconception stated in his reply is that term insurance covers up to age 75 old. You can actually get term policies to cover you up to 99 if you wish.
Any good financial consultant would advise their clients where to park their money saved from buying term insurance and benefit from higher returns while ensuring a dependable source of income for their loved ones in case something unfortunate where to happen.
http://www.sgcreditsmart.com
I could not help but noticed how unbalanced Hendri’s reply was to the first question.
Buying a whole life policy or term insurance can never the same as buying or renting a house.
A self owned property when liquidated can be used to effectively buy another home / house albeit smaller and ensure that the need for a roof over one’s head is met. You cannot do that with insurance because of factors like age, sex and even illness that crop up later on in life, one might become “un-insurable”.
To say “On the other hand, buying a term policy is similar to renting a house. You incur a lower monthly expense, but the house can never be yours”, is so wrong coming from a practicing insurance consultant.
Term insurance though cheaper, does its job of providing insurance. You still get paid if you meet the criteria for making claims. The only key difference is that there is no residue value when it matures, hence the lower premiums.
Insurance consultants or agents generally push for ILP or Whole Life Policies because they carry higher commissions.
Another misconception stated in his reply is that term insurance covers up to age 75 old. You can actually get term policies to cover you up to 99 if you wish.
Any good financial consultant would advise their clients where to park their money saved from buying term insurance and benefit from higher returns while ensuring a dependable source of income for their loved ones in case something unfortunate where to happen.
http://www.sgcreditsmart.com
Hi Patrick,
Thanks for sharing your perspective.
I guess if one is confident in investing his/her own money and getting much better returns, then a term insurance will better utilize the money. However, I think most people are not very good with their own investment, and hence, having a life policy isn’t a bad idea (it protect their life and their money… away from minibonds)
Of course, there is a rule that you should not over insure yourself such that all the money is locked up in insurance policies. One must always balance protection with possible returns. It will be more practical to have life policy but augment with term insurance to boost protection and at the same time, do not suffer from paying high premiums.
As for protection up to 75 years, I think it is an age where you do not really need term insurance. Moreover, term policy at that age is going to cost a lot more. You are most probably retired with your children grown up and working, and you do not really need to worry about the golden goose dying.
Hi Patrick,
Thanks for sharing your perspective.
I guess if one is confident in investing his/her own money and getting much better returns, then a term insurance will better utilize the money. However, I think most people are not very good with their own investment, and hence, having a life policy isn’t a bad idea (it protect their life and their money… away from minibonds)
Of course, there is a rule that you should not over insure yourself such that all the money is locked up in insurance policies. One must always balance protection with possible returns. It will be more practical to have life policy but augment with term insurance to boost protection and at the same time, do not suffer from paying high premiums.
As for protection up to 75 years, I think it is an age where you do not really need term insurance. Moreover, term policy at that age is going to cost a lot more. You are most probably retired with your children grown up and working, and you do not really need to worry about the golden goose dying.
Hi Alvin,
Good morning. I agree with your thoughts, however just to caution on the point of using an insurance life policy as a saving means because one is poor at investment.
We both know that only a particular portion of the policy is guaranteed, and this is only available when a claim is made based on the insurance it was taken out for, e.g life or TPD. The other portion or cash value is not guaranteed and in bad times this portion may not even be paid out, not to mention the long period before any substantial cash value is available, i.e. when the policy cash value becomes positive.
Lastly, you are spot on, on the age 75 thing. That is why most term insurance ends at age 75 because consumers don’t work after that age and it does not make sense to insure someone who isn’t bringing home the bacon.
In all, I would just like to say that consumers should be clear and understand that insurance is for insurance, if one plans to save, save it in other instruments like a fixed deposit (I am sure almost all lay man knows about FDs). Simply for the reason that when you need money, you can withdraw it from your bank account without putting your policy at risk.
You have a productive week ahead.
Cheers.
Patrick
Hi Alvin,
Good morning. I agree with your thoughts, however just to caution on the point of using an insurance life policy as a saving means because one is poor at investment.
We both know that only a particular portion of the policy is guaranteed, and this is only available when a claim is made based on the insurance it was taken out for, e.g life or TPD. The other portion or cash value is not guaranteed and in bad times this portion may not even be paid out, not to mention the long period before any substantial cash value is available, i.e. when the policy cash value becomes positive.
Lastly, you are spot on, on the age 75 thing. That is why most term insurance ends at age 75 because consumers don’t work after that age and it does not make sense to insure someone who isn’t bringing home the bacon.
In all, I would just like to say that consumers should be clear and understand that insurance is for insurance, if one plans to save, save it in other instruments like a fixed deposit (I am sure almost all lay man knows about FDs). Simply for the reason that when you need money, you can withdraw it from your bank account without putting your policy at risk.
You have a productive week ahead.
Cheers.
Patrick
Hi Alvin,
I thought that it would be good to share this gem of a site with you.
http://www.askdrmoney.com/
Stay productive!
http://www.sgcreditsmart.com
Hi Alvin,
I thought that it would be good to share this gem of a site with you.
http://www.askdrmoney.com/
Stay productive!
http://www.sgcreditsmart.com
Hi Patrick, I truly agree with you with regards to saving. One should not buy insurance as a form of saving. Insurance is not meant for that purpose, and it would not help if you need the money and terminate the policy.
Thanks for the link. Used to read Dr Money’s regular column in Newpaper
Don really see it now… maybe because I stopped reading Newpaper
Hi Patrick, I truly agree with you with regards to saving. One should not buy insurance as a form of saving. Insurance is not meant for that purpose, and it would not help if you need the money and terminate the policy.
Thanks for the link. Used to read Dr Money’s regular column in Newpaper
Don really see it now… maybe because I stopped reading Newpaper
It’s little wonder why AIA agents seldom recommand the “Buy Term and Invest the different” strategy.
Because AIA Terms plan are priced around the highest in the Market.
Not much saving is done when when buy AIA Term.
It’s little wonder why AIA agents seldom recommand the “Buy Term and Invest the different” strategy.
Because AIA Terms plan are priced around the highest in the Market.
Not much saving is done when when buy AIA Term.
Insurance is the ONLY way to protect your assets and not to be snatched away from your loved ones by banks and creditors if you have outstanding loan repayments.
It also provides the necessary immediate LIQUIDITY if trigger events unfortunately happen during economic downturns. Can you guarantee that you can liquidate your stocks/investments/houses at the price you want when you need liquidity the most? Mind you, the banks and creditors are pressing you for repayment of loans and instalments or they would take legal actions against you; your business must continue operating, you still need to pay your bills and maintenance fees and home loans, feed your family members, etc.
Don’t tell me that you’re gonna tell your kids “Sorry, times are bad, daddy/mummy cannot pay school fees, so we are not sending you to school for classes”?
Insurance is the ONLY way to protect your assets and not to be snatched away from your loved ones by banks and creditors if you have outstanding loan repayments.
It also provides the necessary immediate LIQUIDITY if trigger events unfortunately happen during economic downturns. Can you guarantee that you can liquidate your stocks/investments/houses at the price you want when you need liquidity the most? Mind you, the banks and creditors are pressing you for repayment of loans and instalments or they would take legal actions against you; your business must continue operating, you still need to pay your bills and maintenance fees and home loans, feed your family members, etc.
Don’t tell me that you’re gonna tell your kids “Sorry, times are bad, daddy/mummy cannot pay school fees, so we are not sending you to school for classes”?
There is no absolute Right or Wrong with term insurance or whole life insurance.
There is only individual preference and perception.
And there is no such thing as the best plan in the world.
As long as the plan can help the person achieve his/her goal(s), within comfortable budget, offers peace of mind, and the benefits far outweighs the service charges, that plan is a good plan.
If by spending a little extra and get others to do the job for me, so that I can enjoy the profits, coverage, peace of mind, get things done, and at the same time, can place more focus on my career, and spend more time with my family, I think it’s really worth it, given both the vast tangible and intangible benefits.
If you say AIA plans are expensive, then look at Lous Vuitton and Singapore Airlines, both are some of the most expensive brands in the market, but why is it that so many people flock to buy from them? It’s the reputation and quality assurance. If you happen to drive, then you should drive a Chery QQ, don’t even bother to drive a Toyota Altis. CheryQQ is small and light and can serve your purpose, and one of the cheapest around, so why isn’t everyone buying CheryQQ?
Why AIA can penetrate into the whole Asia-Pacific region, and why not for other competitor companies?
Reason is obvious, the facts speak for themselves. You may dispute against a theory, but how would you dispute against a fact?
There is no absolute Right or Wrong with term insurance or whole life insurance.
There is only individual preference and perception.
And there is no such thing as the best plan in the world.
As long as the plan can help the person achieve his/her goal(s), within comfortable budget, offers peace of mind, and the benefits far outweighs the service charges, that plan is a good plan.
If by spending a little extra and get others to do the job for me, so that I can enjoy the profits, coverage, peace of mind, get things done, and at the same time, can place more focus on my career, and spend more time with my family, I think it’s really worth it, given both the vast tangible and intangible benefits.
If you say AIA plans are expensive, then look at Lous Vuitton and Singapore Airlines, both are some of the most expensive brands in the market, but why is it that so many people flock to buy from them? It’s the reputation and quality assurance. If you happen to drive, then you should drive a Chery QQ, don’t even bother to drive a Toyota Altis. CheryQQ is small and light and can serve your purpose, and one of the cheapest around, so why isn’t everyone buying CheryQQ?
Why AIA can penetrate into the whole Asia-Pacific region, and why not for other competitor companies?
Reason is obvious, the facts speak for themselves. You may dispute against a theory, but how would you dispute against a fact?