The 5 Pillars of Life

From Mr T, whom I will be meeting to understand his financial needs and direction soon…

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Hi akhiat
 
I’m XXX, i read your blog online.
I would like to seek advice from you, currently i’m having a whole life insurance policy under TM asia legacy plus 20yr plan – cover S$100k plus S$100k dread disease rider, annual payment of $2294.

I took up this policy under my friend agent, i read your articles and find out that term policy are more affordable than whole life. for my case this coming jun 2011, my whole life policy under TM asia will make deduction from my giro account. i opt for annual payment thus save abit of money compare to monthly payment.

My issue is that, after reading articles comparing term and whole life policy, i am not sure should i hold on to TM asia policy or sign-up for a term policy and the different use for investment either with bank or unit trust by saying this, my first policy payment for TM asia i will not get anything back.
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From Akhiat
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Hi XXX,

To choose a Whole Life or Term plan is a matter of choice and I don’t have the definite right or wrong answer. In theory for BTITD (Buy Term Invest the Difference), if the investments fetches around 5-6%p.a, you will be better off using this strategy. Historically, 5-6% p.a on investments are not that difficult. In reality, the person who adopt this strategy must be very conscious that he is investing the difference for the very long future so that he can self-insured when the term plan ends.

Getting a WL plan (For those with Critical Illnesses) is not meant to be surrendered for cash value, the purpose of a WL plan is to give the person coverage upon old age after 65 or 70 yrs old. Cash Value yield is usually terrible because the insurer have to reserve much funds to take care of the insured when he is old. Protection Yield is acceptable even if the person contract illnesses at old age such as 70 or 75(High chances).

Term plan is to take care of the current problem especially when ones cashflow is on the tighter side and WL plan is to take care of the future problem when continuity is a concern. Different people have opinion as of if coverage is necessary at old age when a medical insurance may suffice.

In my opinion, WL plan is more of a privilege for those who have good cashflow and sufficient funds for many other items. For practicality, he can use WL plan to solve his future problem on coverage continuity and at the same time, he is also able to meet his other pressing needs. I do not agree when people says that WL plan are all bad and like to present them in all negative light, using basis of reduction in yield and distribution cost. If $2k/yr is really a concern for your cashflow and you are grossly under-insured for your current situation, then it might be better to take care of your current problem via a term first.

Both Term and WL have their merits and if you get a term that covers you beyond 70 or 80 yrs old, you can expect the premium to be close to what you see for a WL plan and yet not limited in premium term…

Its your choice if you wish to consciously save for your own protection when you are 70 or 80 yrs old. As for me, I have a good combination of WL, Term and Group Term to give me the coverage I needed with a partial hedge against Critical Illnesses Coverage at old age. In conclusion, I don’t have the answer for you and your situation…
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Reply from Mr XXX
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hi akhiat

thank for your opinion. look like there is no define answer for me, only problem is how much i can afford.
i shall talk to my FA and see what she can advise me.
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Akhiat’s reply
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As mentioned, there are no rights or wrongs. If you ready to adopt the BTITD strategy, you must be clear on what you are doing and maintain the strategy. You must not let other temptations interupt this strategy. I have seen far too many people who don’t even buy term insurance and spend their money on the next holiday, shopping spree and a bigger car. There are too many things in our life that interrupt our savings discipline.

Do something that you are comfortable with. I had maintained a small WL plan because I wants an assurance of some coverage after 65 when my term plan ends. I don’t think that premium is really hurting me that much too. At the same time, I’m savings considerably through a portfolio of unit trust and shares.

Its up to you on the strategy you wish to adopt. Good luck in whatever choice you decided upon…
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From Mr XXX
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Hi adrian
 
surprise to recieve your email at this point of time, i am currently reading through articles about insurances.
 
this afternoon i met up with my agent and i express my concern about the policy i’m holding, the reason she quote me was that, WL policy shld be lay as the basic foundation and term policy add to enhance the whole protection.
 
if only getting term plan which cover till 65yrs old, what about the part after 65yrs when you are old and needed protection the most and for whole life i only need to pay 20yrs and 100k coverage for whole life while term, you hv to pay every year till you do not want it anymore.
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My reply
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Her answer was expected from a typical adviser. She was not entirely incorrect but she missed out 5 points which I can think of now…

1) You can have have your own strategy to accumulate this fund for Self-insurance by the time the term policy ends. (its not difficult if we are disciplined enough)
2) It is also not true that when we are old, we need the insurance more, in fact should be less. (higher occurrence not equal to higher needs)
3) The Sum at Risk for a Whole Life policy get lesser over the years, especially when you are older (Sum at risk = Sum Assured – Cash Value). This means the insurer’s liabilities get lesser and more despite your Sum Assured seemingly gets more.
4) If you are under the TM Legacy Plus, your Sum Assured beyond 65 is likely to be lower than the minimum Sum Assured.
5) There is a good chance that Insurance company may cut bonuses over the years and your Sum Assured might be lesser than what you see.

The above are reasons why I’m not a very pro Whole Life insurance person and remains a poor adviser, recommending term, disability income and medical insurances… Despite saying all these, I still keep a small amount of Whole Life insurance to hedge the other side of the coin…

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Mr XXX then contacted me and arranged to meet and understand more…