Sunday, May 09, 2010

For whom is the whole life insurance meant for?

Just for whom is the whole life insurance meant for?


I've heard a number of people saying that they don't want to buy whole life because when they get older, their dependents would have grown up and thus there's no need to cover them anymore. The alternative is thus the term life plan because it's cheaper. This seems to suggest that the whole life plan is just for the coverage of their dependents in case the sole breadwinner (the person insured whose life is insured by the whole life policy) passed away.


My post here is to question that very assumption - that the whole life plan policy is to cover dependents in case you pass away prematurely, thus leaving them with a huge lump sum.


I do not use the whole life for such purpose. There are cheaper alternatives for such lump sum gift for those loved ones you leave behind to take care of financial matters. I propose that a whole life plan can be used to protect your own savings that had been built up thus far, from events that can erode it considerably. Events such as cancer, stroke, heart attacks and any other events that are debilitating yet not fatal immediately. In this sense, whole life policy will act like compulsory savings to force you to save up for such events.


Term plan can work the same, yes. But the catch is that term plan coverage only last around 60 yrs whereas whole life plan cover for an extended period till 100 yrs old.


So what happens between the years when your term plan coverage ceases? I think whole life can be used precisely for that purpose - to cover for the period when your term plan no longer covers you, until the day you pass on.


If something strikes you after 60 yrs old, and you do not have whole life coverage, someone will have to foot the bill. There are hospital and surgical fees to take care of, and there are other fees that had to be incurred that do not require hospital stay. Only the former are covered by H&S plans, so what about the latter? Things like non-standard drugs, stay home nurses and maid, overseas treatment....who is going to pay for them? The H&S plans do not cover things like that and I do not want to burden my spouse, relatives or dependents, so I have to depend on myself. But I do not trust myself that I can save up enough for such purposes, hence a whole life plan is critical for me to hedge against my own ability to prepare for such events.


I think of my own situation. I am sandwiched between two parties - the needs of my parents and the needs for myself. I've to buy insurance for my parents because they only have enough savings to take care of themselves if nothing extraordinary happens. If something is to happen, it will firstly wipe out all their retirement savings and secondly tap into my savings too.


They told me if something bad is to happen to them, I don't have to treat them because there's no point. I do not think I can do that. Can anybody do that? Not me. I only have limited amount of savings to handle my own affairs. If I have to help my parents, who would foot the bill for me if something is to happen to me? My dependents? Then this whole cycle will repeat again!!


I'm not a saviour nor a hero to rescue my future generations from this vicious cycle. I'm just a normal person struggling to make good on my dual duty as both a kid to my parent and a parent to my kids. It is only responsible for my kids to be born into this world without the excess baggage of the previous generation. I might not be able to do it, but hey, guess what, I'm doing my best.


It's also a bit too much to ask for a product to cover all of this stuff that I've talked about. It's not possible. I'll try to cover as many loopholes as I can foresee and do my best to steer my ship as danger free as I possibly can.

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Do note that I'm not a financial advisor. Of course I'm not. I'm just trying to make sense of all the debate here and there and reason out for myself on the actual purpose of certain insurance policies. I believe that no financial advisor can do that for you - you've got to think and reason it out for yourself. I do not presume to think for everyone, because my situation is uniquely mine. So do not follow me, because I'm not your leader. Do not walk ahead of me, because I might not be able to follow you. Do however, walk beside me as a friend, so that we can all share and discuss all our interesting life experiences together.

24 comments :

CreateWealth8888 said...

Don't ever get confuse with life protection verus critical illness they are totally different while insurance sold them as whole life with critical illness.

Life insurance is used for hedging to protect earned income, when one doesn't earn any income there is nothing to hedge unless one wish to pass on some gift in form insurance money.

Critical illness can somehow protected through medisave, medicalshield, additional medical insurances, and in the worst case o for social medical subsidy and seek class C treament

Exactly, your title fix it nicely - know what whole life meant and don't be fool by insurance company when they add critical illness part to whole life and make people blur.

In my time, whole life is whole life, medical insurance is medical insurance. It is pretty clear, nowadays the insurance companies become too smart and make it blur.

More on ..

http://createwealth8888.blogspot.com/search/label/Education%20-%20Insurance

CreateWealth8888 said...

maybe your need for whole life insurance coverage may be vastly difference from those have already have CPF and covered by CPF Life and Eldershield. That must have shaded your thought differently on the whole life thing.

Anonymous said...

Hi LP,

I do like coverage that last "whole life". eg.critical illness plan ridden on a whole life plan tt covers till 100 yrs old. (The Add-on Critical illness usually last till 60-65). I reckon then, & told my clients, u either die or claim on critical illness.

My collegues were good in selling "coffin policies" then.

I cash out some of my policies now since I do not need them anymore due to changing circumstances. One of which was my USD policy.

My thoughts for some plans like travel, H&S, personal accident also change.

Maybe I should get a copy of rate book .. to get in touch with the latest :) Thanks LP for sharing!

Cheers,
hh

Createwealth8888 said...

http://createwealth8888.blogspot.com/2010/05/insurance-human-asset-and-liability.html

la papillion said...

Hi bro8888,

I agree with you that everyone should know what they are buying the products for. I had my own uses, but I do not speak for anyone else.

I don't think you can buy a whole life plan without the C.I rider now. It comes attached. There really is no confusion over this. The CI plan that is stand-alone offers a term plan kind of coverage, not the cover till 100 kind that I wanted.

It seems that you wanted to use whole life to cover loss of income. I do not dispute that, though that is not my aim of buying a whole life.

My aim is to protect my dependents' savings (and my own) so that a portion of it is already set aside for such purpose. It is NOT used to protect loss of income when I'm not around. I would use term plan to cover that instead.

I mentioned that there is a loophole where term plan no longer covers upon hitting age 60-65. I wish to cover that period using whole life.

I do not understand how having cpf would matter. When you're sick, I don't think you can use cpf (except medisave and for a limited amt) to treat yourself. Am I wrong on this?

Regarding your post, I do not understand what's a whole life endowment policy. Never heard of that before. Can explain more on it?

la papillion said...

Hi HH,

Hmm, I guess the other good thing about having a whole life is the cash part, thought I wouldn't buy it thinking to cash it out in the future. In other words, I'm not treating whole life policy as an investment product at all.

But I guess our goals changed and our needs will vary so many years after we've planned it. It's a good option to have that money for any purpose...gift for dependents, travel or anything :)

Shine in rain said...

There are still whole life policies that separate the charges for CI and the life plan so you can choose to 'opt-out' of CI. The thing about CI is the pay-out terms are quite stringent. one can be very ill or have a prolonged illness but not critically ill enough to get the insurance's claim, that's my main concern.
And i am not sure how good is getting an income shield shld one not be able to work and does not want to burden the family. i supposed the premium of it is not cheap.

Createwealth8888 said...

Sorry bro, you are wrong.

Q: Can I withdraw my CPF if I am no longer fit for employment? If so, what do I need to do?

A: You may apply to withdraw your CPF in the Ordinary and Special Accounts if you are suffering from an illness which has resulted in you being permanently unfit from ever continuing in any employment.

http://createwealth8888.blogspot.com/2009/11/critical-illness-cover-pitfalls.html

la papillion said...

Hi shine in rain,

Hmm, if you can separate the CI out of the whole life, then the only distinguishing feature of a whole life against a term is the participating fund. I don't think like to have investment tied up with insurance, so I would never get a whole life without the CI rider.

You're right. Having a CI plan doesn't mean that you can claim it. But I know if you didn't buy, there's nothing at all to claim for.

Self insurance is still a must. I just aim to outsource some of that risk to a third party. I must still have my own savings as a secondary defense in case such things happen and I cannot claim.

la papillion said...

Hi bro8888,

Ah, I didn't know that. Thanks for letting me know bro8888. Well, that's good then. I wonder how many people in my generation will have enough CPF for such purpose.

CPF is for retirement savings? I think it's getting clearer that it's no longer just for that. A big chunk is used to buy a property, another big chunk is used for education...plus the lowered employer's contribution rate....I don't think we can suitably rely on the 'natural' contribution rate to save up for such events. DEFINITELY not enough.

If it's not enough then how? Save aside in fixed D? Contribute to CPF voluntarily? Invest? It's an interesting thought..I wonder if anyone save money not for wedding, not for housing but for medical expenses in the future.

Food for thought.

Createwealth8888 said...

For those not investment savvy, voluntary topping up your retirement account may be a good idea.

Anonymous said...

Hi LP,

Indeed! hahaha, I never bought any endownment on my own & few of my clients bought it because I was so much for whole life. Those days, whole life and endownment offer almost same return on 21 yr. And for whole life you have a choice to continue!

The endownment paid out more for early surrender though, & have option to take cash periodically.

My clients were advise to put in the cash back in, for some 4% returns? (better than fd rate) Sis's 21 yr endownment is maturing soon. Time flies. :)

I am keeping my whole life plans ridden with CL. All my plans were ridden with 1/2 CL and 1/2 CL waiver. Meaning if I contact CL, I will get 1/2 the sum assured and premium for the policy waived. If I live to cash out, I will get 1/2 the cash value then, or still get 1/2 sum assured coffin policy if I die. Hahaha...its a funny way of planning but I like it, so most of my clients have it this way too. I like it then as the sum assured increase a few % each year to take care of inflation - death or CI, its good to have increasing coverage. Can't be so without the "saving" component.

As I was still a student when I sold insurance, most of my friends bought from their pocket money :), less than $2 each day, now they can cash out 20K+ or continue to have around $90K coverage on CI and life. (started with $50K, increase to around 100k now over 20 yrs). I thought this was very very affordable compare to the "coffin policy" premium my older collegues were selling. Just less than $2 a day. Some of my clients grew, and to the day I quitted, one asked for policy of of 12k per yr. Another increase the coverage from 200k to millions because of rapid increase in networth.

USD policy pays high %, so early surrender still have +ve returns. At the rate US and SG are going..USD might be below par in years to come. :) My clients bought it for education purpose.. hahaha.. we thought we will all sent our kids to USA for study then. If there is a RMB policy now, I would probably sell them that way too :)

Thanks for your post LP, as u can see I am still passionate abt insurance :) I better monitor one of my core stock - an insurance company & act accordingly.

Cheers,
hh

la papillion said...

Hi HH,

Thanks for sharing..i really dun know why pple buy in usd. Ok, now i know :) Interesting how i never tot of it this way :)

I'm already buying more term plan plus the disability income policy I mentioned last time. But this time, I going to get a much cheaper version of it - the safra aviva one. It's a group insurance, so hopefully it does not have 'discriminating' premium due to my job. Overall, I'll get around 2-3x coverage for the same dollar and it also includes a 100k term, so it's quite worth it, at least for my case.

Glad to hear that you're still passionate. I think like investing, insurance is also part of the bigger picture of financial management. Cannot just think of offense, must also equally focus on defense :)

patrick lim said...

hi,

reading your latest blog on whole life insurance is certainly interesting and more importantly, heartwarming.

but going by the comments, i believe consumers are by and large, not really aware of the full suite of life insurance products available from our local market.

for example, even for whole of life products, there are many insurers offering true whole of life coverage.

what do i mean?

you quoted whole life coverage to cease on attaining the age of 100 years but there are many insurers offering true whole of life products (coverage for death and or 30 critical illness) without any expiry/maturity date meaning if there is no claim admitted and paid, the coverage is for as long as u live.

whereas the other embedded benefit in whole of life products is for total and permanent disability which usually terminates on the life insured's 65th or 66th birthday.

and last but not least, there are probably another 1001 things u can always ask about insurance but hopefully not afraid to ask your financial adviser.

cheers and keep on blogging, bro.

Raelynn said...

my mom who was an insurance agent told me that if you have no money for insurance, you must must have the hospitalisation. then have at least one life policy- if not for the purpose of leaving money for dependents, then at least for the cash fund in case something big really happens and you urgently need cash, then the rest you top up your coverage using term insurance. the cheapest way is of course through the aviva NS insurance. but i think there are also other term insurances?
meanwhile do investments.

i do agree with her view that no matter how investment savvy you are, you never know what happens (my mom does invest actively but she also purchases life and term etc insurance). precisely because there is this risk, we buy insurance.

Createwealth8888 said...

Saving, insurance and investment are three distinct components in financial planning and they don't substitute each other.

http://createwealth8888.blogspot.com/2010/03/saving-life-insurance-and-investing-2nd.html

la papillion said...

Hi patrick,

Thanks for your insightful comments :) May I know why this post is heartwarming? haha

I guess there's a lot of other products out there :) 100 yrs of age is the figure I used, though I'm aware there are products that last until you pass on. It's used to give a figure to contrast against the 65/66 yrs for term plan :)

Thanks for your encouragement, will keep on blogging, haha :)

la papillion said...

Hi Raelynn,

I have the same idea as your mum :) That's what I'm doing too, haha :)

Owl said...

Hi CreateWealth888,

your assumption that we can make use of CPF money if we are critical ill may need to really verify by the CPF board on how many claim had actually been make by Singaporean before.

The condition that CPF board based on is like TPD definition but according to insurance company, the amount of Claim that was payout in the past number of years is very very low as compare to the amount paid to Critical Illness coverage. If not, why is it that the premium for TPD is so low as compare to Critical Illness.

Something to ponder about.

Createwealth8888 said...

Not the same. Insurance companies are not our father or mother who pour milk into our mouth, they exist to make money for their mgmt and shareholders.

We don't make a claim on our CPF money. It is our own money but we only request for early withdrawal and CPF rule allows it.

Just like those give up their SG citizenship, they are entitled to cash out their CPF.

Or when the doctor gives this advice: "Go and do whatever you wish to do". Then ask him to write a medical report to apply for early CPF withdrawal.


Surprisingly, many CPF members are not aware of this rule:

Q: Can I withdraw my CPF if I am no longer fit for employment? If so, what do I need to do?

Createwealth8888 said...

Insurance Companies Work for Shareholders, Not Customers

Understand why?

http://createwealth8888.blogspot.com/2010/05/insurance-companies-work-for.html

la papillion said...

Hi bro8888,

I've read your post on the insurance companies. While I do not dispute that certain % of the legitimate claims are not paid out, I think this % should be small. Otherwise, it will affect their business and they will not be able to maintain status quo for long.

More likely, they are restricting the kind of customers they are. By filtering those 'troublesome' ones away, they already reduce their chances of claim. Add to the fact that the premiums are calculated such that the odds of taking in more premiums is more than the odds of giving out, the insurance companies already have the odds on their side.

These days, it's not that if you want insurance coverage, you can get it. They will screen you up and exclude the most minute of things so as to reduce their risk.

Chong Kong Hui said...

A very good sharing.

Sometime, it is not the agent fail his/her duty, it is the client refuse to talk.

May be there are not enough "good agent" out there.... may be...

Daniel Maxwell said...

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