My ideas on insurance

As a lay person to insurance, it is not easy to ‘break into’ the knowledge banks of insurance. While I profess that I’m no way near a level where I can tell people what to do with their insurance, at least for now, I understand my own insurance needs and plans – which is the raison d’etre for wanting to know more about insurance.


Let’s just talk about the difference between a whole life plan and a term plan. A whole life plan is an insurance policy where the insured gets a cash value, usually towards the 3rd year of the policy. This cash value will grow in value, and it consists of two parts – the non-guaranteed part (usually projected at 3.75% or 5.75% pa) and another guaranteed part. The whole life insurance plan puts the premium that you pay into a participating fund (par fund for short). This par fund consists of a mix of assets, usually more geared towards bonds (higher percentage) and equities (lower percentage). Back in the heydays of bull markets, insurance policies of olden days project their non-guaranteed returns at a rate of 7-10% (that’s what I heard from others) and the selling point of these policies is the high cash values (as always, compared to fixed or savings accounts in banks) that the insured stands to gain when he cashes it out. I think it didn’t work out too nicely when the insured realized that the actual cash value is so far off the projected returns years down the road.


Well, on paper, anything goes. The best and most sophisticated model might not yield the most accurate predictions. Hence, for me, I never like to look at the non-guaranteed part of the cash value. It’s better to plan your life on not having the non-guaranteed portion than to have a shock in the future. This philosophy of not looking at the non-guaranteed portion of any cash values in policies extends not only to whole life but to other savings plans too. I just never look at the non-guaranteed part of the cash values. Call me a conservative if you wish.




To me, insurance is not about investment. I do not think highly of mixing insurance with investment. Obviously not everyone thinks the same as me, hence it’s crucial to decide how you treat insurance. As KK puts it, are you treating insurance as an expense or as an investment? If you treat it as an expense like me, you’ll want a cheap insurance with maximum coverage in terms of both breadth (i.e. how much coverage) and length (i.e. duration of coverage). You’ll not care for any cash benefits or returns because this is immaterial to your purpose of buying insurance. On the other hand, if you treat insurance as an investment, then you’ll want to worry about how much returns you are getting, and whether the returns are mostly in guaranteed part or non-guaranteed part, the composition of the par fund etc.


There are no bad insurance products, just a mismatch between products and the buyer. If you want to be serious in being financially independent, you’ll have to take responsibility in finding out more about insurance as it’s an integral part of being financially responsible to yourself and your family.


Now, what about term plans? Term plans, firstly, have no cash values to talk about. It’s purely for insurance and the premiums you paid are not put into the par fund to grow it. Hence, the premiums are usually much cheaper (around 4 times cheaper, all else being equal).


I think it’ll be good to list the comparison between term plan and whole life plans here:


Personally, I’m holding 2 whole life policies. One is a traditional whole life policy where the policy will be in-force as long as the premiums are paid. The other is a limited payment whole life plan where the premiums are paid for a period of your choice of 10 yrs, 15 yrs, 20 yrs, 25 yrs etc, but the policy will be in force till you expire (or up to age 100).


The reasons I bought and the reasons I’m holding are quite different. Since the reasons why I bought are less than stellar, let’s talk more about why I’m still holding on to the whole life plans:


1. For the limited payment whole life plan, I like the fact that after a period of 15 years (I chose it), I do not have to pay for the premiums anymore. This will cover me for 100k for the rest of my life, with an additional option to change to an annuity upon hitting a certain age. This means that I will not have to pay for the premiums for this plan when I reached age 45, well before my retirement age. This certainty is well worth the extra premiums I paid for this plan.


2. The limited payment whole life plan will be my base insurance coverage till I expire. I have no intention to convert to an annuity plan nor to cash it out, otherwise I would not have any more coverage. Should I hit any unfortunate event after I cashed out my plan or converted to annuity, my savings will be eroded. This is not something I would want to happen towards the end of my life.


3. The other traditional whole life plan I will have to cut upon hitting retirement. I wonder how I can pay the premiums to keep the policy in force after I stopped working. Hence towards the end of last year, I started to cut the initial 180k coverage to 50k to reduce the premiums paid. Thus, I would have a sum of money ready the moment I decided to cash out this policy.


Having settled my base insurance, I will next work on temporary coverage using term plans. This will start as soon as I start my family. The reasons why I chose term plans are:


1. The term plans is to boost my insurance coverage in case something happens to me, so my dependents will need a sum of money to maintain their current lifestyle. But as my dependents get less dependent on me, I do not need to have such coverage anymore.


2. Ideally, I plan to boost my insurance coverage using term plan, for a period of D+25 years, where D is the year where my last child is born. 25 years should be sufficient time for the last child to earn his/her own keep and hence will no longer be dependent on me. The term plan should also be sufficiently cheaper than whole life plans, so the financial burden will not be too great on me.


The whole idea here is to use a combination of whole life and term plans to achieve exactly the goals you want to achieve for insurance. Limited whole life plan to act as a base insurance coverage, topped with term plans to boost coverage until the dependents get less dependent. Of course, other essentials like hospitalization and surgery (H&S) plans, personal accident (PA) plans and disability income plans are crucial for a well rounded insurance coverage. Perhaps more on those in future posts.

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Note that I'm not a qualified financial advisor. I'm just posting my thoughts on it, and I do not advise anyone to follow my own philosophy towards insurance. Do seek the proper advice if you need more help. There is a possibility that the information given here is wrong. Hey, what do you expect from a layperson trying to break into the insurance bank? Gimme a break (literally)