Thursday, August 13, 2009

Savings in life policy

I was looking at Tan Kin Lian's blog. He was lamenting on the poor returns of life policy (meaning whole life insurance). He mentioned that it will breakeven after 15 yrs and the returns are somewhat in the range of 3% to maybe 4%. I've some thoughts about it and I would stress that this post is not to criticize him, but rather to voice out my opinions on the same matter.

I totally agree with Mr.Tan that whole life returns is not fantastic. Buying a whole life insurance is certainly not the best way to maximise your returns. But I think those who buy whole life insurance to save up is missing the big picture. One of the most prominent advantage of using whole life, as opposed to term insurance, is that you are covered until til 100 yrs (plus minus), whereas term life covers you until age 60 (plus minus again). If you think that you only need to cover yourself until age 60, then why buy a whole life plan for? If you intend to cash out the returns from a whole life plan, then why buy a whole life plan for?

I believe no products are bad. It's just a mis-match between the problems that you intend to solve and the solutions you used to solve it. If you need better returns, then don't buy a whole life plan, buy something that gives you better returns. If you hire a maths tutor, but complain to the maths tutor that the science results are bad, I think you need to hire a science tutor, not a maths tutor.

Now, I would be totally pissed off if there is misrepresentation though. If the whole presentation during the sale of the whole life is about being about to save a PROJECTED 8% (for example only), then something needs to be done to the industry. Then again, projected returns are just that...it's looking at a crystal ball and soothsaying what will happen in a very long timeframe. If it doesn't happen, too bad. Do you blame the soothsayer or the person who believes in them?

9 comments :

CreateWealth8888 said...

I believe those Whole Life and Endowment policies purchased some 15 years or more are those without Critical Illnesses.

For critical illnesses, if the assured sum is very big, don't think your claim is going to be easy.

la papillion said...

Hi bro8888,

Ok, not too sure if those purchased in the past included critical illness or not. But I see what your pt is - you're afraid that buying a whole life and paying so much for the premium, and in the end can't claim. Valid pt.

This post is talking about pple who buy whole life insurance as an investment, looking for a return by cashing it out. I don't think it's wise to do that.

musicwhiz said...

Hi LP,

I know this is not related to your post, but I just wanted to highlight that China Milk is being discussed extensively on Wallstraits Forum, and is being dissected by value investor extraodinaire - d.o.g. (I need another 20 years to beat this guy hehe).

The link is as follows:-

http://www.wallstraits.com/wsforum/showthread.php?tid=2873&pid=28937#pid28937

Have a good read, I think it's pretty informative !

Regards,
Musicwhiz

CreateWealth8888 said...

China stocks are for speculation and not for long term investments. Punters knew that.

CreateWealth8888 said...

Last time confirmed no critical illnesses or ILP. The insurance industry eveolves to package insurance with investment linked product when market is hot and then packaged with it with critical illness when medical bills are high. Ask Jade to research the development of insurance. The insurance industry almost dry out if not for govt action to allow CPF to purchase ILP

la papillion said...

Hi mw,

Thanks for the links :)

Wow, he's good. Now i'm worried, haha :)

Createwealth8888 said...

if you start worrying about your investment, then it is time to sell or else don't worry and be happy as you can earn back your losses by other means.

Anonymous said...

Hi LP,

I bought lots of whole life policies. zero endownment policy. when I was an agent 20 yrs ago.

Critical illnesses was added unto whole life by signing a form & (making paying extra premium) when it was introduced around 15 yrs ago.

Only when critical illness is riden unto whole life that it covers that long. Others, cover only up to 60-65. I do advise all clients then that we need the coverage as long as we live. Its either u die or claim CL.

Insurance projected returns were honoured up to many years (prior to 89) until 97.

I have a friend who pay almost 20K premium yearly. Has a huge portfolio of dividends stocks. The returns till 2009, once declared, is guaranteeed. Overall, the return is still not bad; as u can see from your latest post compared to return of "cash".

With his strategy, He may/maynot take out the money in his life policies. Life insurance policy taken up under section 73, (for wife and children) protect against creditors. (don't know its still valid now as I saw debate regarding section 73). He also may leave some for clearance of estate duties when he dies. Endowment policy do not have this added advantage.

Some of my life policies reach 20 yr this year. I am curious to see the overall return but I won't take them since it is part of the designated % in my portfolio. Overall its still better than cash return now.. with protection!

I also have friends who took up Life policy to cover child's education. Yes, indeed, 20 yrs later, they may realised they do not need to cash out because they have other means of financing the education.. and they can continue with the life plan.

Before we talk about returns, its utmost important to protect the capital. As someone says, first rule of investment is "don't lose money" second rule is "follow rule number one". I do know of many who prefer to use Life insurance as a way of saving, including the guy who is has a huge stock portfolio.

*My conclusion: Insurance companies are in my core portfolio now. I put my money into insurance policies last 20 yrs. I put money into insurance companies now in the next lap.

HH

la papillion said...

Hi HH,

Wow, thanks for sharing with me :) Personally I also think that we need to protect our capital before we even invest in anything. It's frightening that there are some who wants returns even before they protect themselves. If disaster strikes, all their returns will then be used to pay for that, maybe plus more.

I will still not park money into whole life policies just because of the cash values. There's a real worry that I might not keep up the payments when my expenses increases or my salary drops, and when the policy is terminated as such, the returns will be 0. As with all financial planning, proper asset allocation is very impt.