Monday, August 16, 2010

Old people don't need life insurance?

I was browsing through some of the blogs when I saw Mr Tan's post on insurance. It's his usual style to advice people to buy term and invest the rest. But that doesn't attract me - it's this line:


"There is no need for people to have life insurance when they are old."


By 'life insurance', I take it that he means the whole life variety - those plans that gives a lump sum pay out in the event of death and total permanent disability of the insured person from the inception of the policy till age 100.  This is very different from the very much cheaper term plan where a similar lump sum pay out will be paid out but it is usually up to age 65. However, life insurance these days come along with a critical illness (CI) rider that allows a lump sum payment when it strikes. Since this rider 'rides' onto the main plan of the whole life, which is up to age 100, the CI cover will also be up to age 100. I am under the impression that CI stand alone cover up to age 100 is either exorbitant in price or does not exist.


What do we need when we're old?


I think we need a comprehensive, as-charged hospitalization and surgery plans (H&S) that covers the expenses if you are hospitalized. The key word here is that you must be hospitalized locally, otherwise the H&S plans do not cover them. Some had mentioned that instead of using the CI cover that is usually attached to whole life plans these days (and covers up to age 100), we can use the H&S plans to replace CI cover from age 65 and beyond. While it's true that H&S plans cover treatment of CI, it's also relevant that H&S covers expenses ONLY if you're hospitalized in local hospitals. If you remember Charmaine's case, the little girl had to seek alternative cancer treatment overseas because the local hospitals do not have this particular drug (pardon me if I remember the details incorrectly). The cost turns out to be 350k USD and this huge sum definitely cannot be covered in the H&S plans unless you bought one of those special ones (not to forget, expensive ones) that covers overseas hospitalization bills as well. A lump sum payout by the CI rider will be very helpful in such cases. Even if it's not for overseas treatment, the lump sum is good for covering expenses related to the critical illness outside of hospitals, which is currently not covered under the H&S plans.


(Of course, you might not be able to claim your CI even if you have CI, particularly with regards to cancer. This is because of the very stupid clause where the cancer had to be in the ending stages. I ask, if it's in the ending stages, why seek treatment? If it's not the ending stage, how do I get the payout to seek treatment? Catch 22...)


I've no idea why the doc and the man is so happy with the latter throwing away his money


Do old people need death payout? It's perfectly correct to say that when we're old, there is no more dependents. If your life insurance is planned for your dependents, then obviously you do not need it when there are no more dependents. In that case, getting a term plan is perfect because unless you have a kid beyond age 40, by age 65 your dependents would already have become independent. This makes the life policy meaningless. What about the cash value of whole life plans? It's really nothing much to shout for, because if you invest in equities related instruments, you'll probably end up getting more (or losing very badly). If you need to invest, don't buy a whole life plan obviously.


It thus appears that the one redeeming feature of whole life policy is the CI cover up to age 100. I faintly remember someone mentioning that if you start savings now and invest it wisely, by the time you need it after age 65, you can self-insure the costs, especially if you bought yourself a good H&S plan. What if I can't save enough or what if my savings are all lost in the bear market? I would insure against that possibility with a few layers of defense:


1. A fully paid up whole life plan with sufficient (but not overly high) CI cover to protect my savings from age 65 to age 100. This is to reduce the premium so that I can sustain the costs of maintaining the policy, which is not going to be cheap compared to term plans.

2. A good amount of savings.

3. Be darn good to my children so that if I need them to take care of me and I have the financial means to fund it, filial piety can be quite a given. These days, one has to provide the conducive environment for children to be filial - by being a good natured senior citizen and a financially 'okay' senior citizen.


What about now to age 65? Get a term plan lah, it has depth of coverage but do not have the length of coverage. Who says you have to buy term and invest the rest only? You can buy term, buy whole, save up and invest!

16 comments :

Jeremy said...

Dear LP,
I am for the case of buying just enough whole life insurance with critical illness coverage, and also hospitalisation plan. If one needs more pay-out coverage, boost it up using term plan while one still has dependants.

Ultimately, one has to be careful not to overbuy insurance nor be undercovered. During one's working lifetime, work to accumulate various consistent passive income generating assets so that when one is old, he does not solely depend on insurance coverage alone, but has another backing up by the income generating assets he has accumulated during his/her younger working years.

However, even when all is done, it is really not possible for one to predict nor control the circumstances he/she will eventually face in future. Some people live to ripe old age without major sickness, so all preparations seems reduncdant to them while others even after much preparations may land up with tormenting sickness when old that even amass wealth does not matter to them anymore than the physical torture of their body.

This is the reality and fragility of life that one has to face, whether like it or not. It is not the circumstances one face that makes life meaningful, but how one responds to and makes decisions on every circumstances (good ones and bad ones) in life that determines whether his life was lived meaningfully based on his responses/ decisions made.

Jeremy :-)

Createwealth8888 said...

Our fiancial resources are limited and you have to spend it wisely. Insurance is just of those expenses.

Plan early for our retirement and by 65 our kids should be already independent and we should be ready to go away peacefully even we don't have enough money for better health care.

Createwealth8888 said...

Sometime, I wonder are we con by the insurance industry, when we are over 65 and striked by critical illness. I don't think we can last very long unless we have plenty money to spend on excellent health care to keep alive. Lacking of money can mean quicker exit from this mortal world.

Createwealth8888 said...

http://createwealth8888.blogspot.com/2010/08/critical-illness-insurance-pays-you-for.html

la papillion said...

Hi Jeremy,

I've the same idea as you. Got whole life, h&s, and more recently got myself the saf group term plan + disability income.

Overbuy? The problem here is to find out where your needs are vs your possible risks. Much easier said than done - almost like finding a needle in a dark room because we're dealing with prediction and forecast of over 30 yrs. Not easy. Thus I agree with you that we cannot control everything. Neither should we try to do that.

Thanks for your prompt comments :)

la papillion said...

Hi bro8888,

I agree with you that resources are limited, so we cannot over buy. It's the details that is crucials...how much do you need, when do you need it, what forms of cover do you need...

I'm not prepared to face the fact that I'm going to give up on life because when I was younger, I do not have the foresight to get myself adequate coverage. I want the 'exit' to be a choice, not a 'no-choice' decision.

AK71 said...

Hi LP,

I have 2 whole life policies and numerous endowment policies. In the last 2 years, I bought 3 CI policies from AXA, each covering 100K. They have different durations: one to cover me to 55 yo, another to 65 yo and another to 75yo. I rationalised that I should be covered more in my younger years.

I do not have "a comprehensive, as-charged hospitalization and surgery plans (H&S)" or is my Incomeshield plan the same? I bought a rider to cover the deductible and co-insurance.

Createwealth8888 said...

It is time for you to review your medical insurance needs for yourself and your family.

http://createwealth8888.blogspot.com/2009/12/critical-illness-insurance-pays-you-for.html

la papillion said...

Hi AK,

From what you said about deductible and co-insurance, it is the same H&S plan I'm talking about :)

I heard that they had increased the premium to pay for the rider recently. May not affect the age bands of our age presently.

Sigh..the cost of escalating health costs and the downstream cost of insurance.

Anonymous said...

Hi,

For your info, although CI rider is tied to a whole life plan, there is a clause which states that the coverage will end at age 65.

So far, I haven't seen any CI plan in the market which provides coverage beyond age 65.

Createwealth8888 said...

Brolp, have you checked your CI plan? Cover beyond 65?

la papillion said...

Hi anonymous,

Am I know which plan you had that your CI rider is tied to? My main whole life is vivolife, and it covers beyond age 65.

I think you need to consult your financial adviser. I am very sure that the CI plan tied to whole life will cover beyond 65, unless it's an early payout plan. If you're talking about TPD, then it will stop at age 65.

May I also know which clause you are referring to?

Hi bro8888,

Ya, mine is covered beyond age 65.

Adrian Khiat said...

Hi LP,
This is a nice post and I enjoyed reading it.

In my opinion, the person who chooses BTITR or WL or mixture option must know what is their ultimate objective. They must understand their needs, preference, experiences, values, etc...

There are indeed many agents who push for only WL and using fear to get the person to buy WL. They will say "What if" you contract illnesses at age X, exactly when your term policy ends? and "Don't you think you have higher chance of contracting illnesses at old age?", etc.

They are influencing their prospect by fear and not by needs.

There are also another group of BTITD fanatic who uses assumptions of constant and straight line investment returns even into years of retirement where the supposed "Self Insurance" fund kicks in.

There is an information overload on BTITD Vs WL that confuse people. When there is this Mr TKL and many other put on sweeping statements like "Paying your agents too much" and words of "Unethical agents by selling WL", people who read will rather not do anything or to look deeper on what their objectives are...

la papillion said...

Hi Adrian,

Thanks for your comments :)

I agree with you, it's a good idea to map out the kind of insurance objectives you want before you get the products. That's where talking to various people (extremes or moderate, haha) is a good starting point.

I think that all products have their functions in the market. I cannot think that an evil company with evil agents can survive for long, but we must of course protect ourselves through knowledge and a thorough due diligence before committing to buy anything.

A dear friend said this once,

Some insurance is better than no insurance; the right insurance is better than some insurance.

We can always get 'some' insurance. But which is the 'right' one? That's always debatable.

jhon smith said...

really good information...
but i think they need it...

Seth said...

Older people (40 and up) can also use their Medisave savings towards getting Eldershield supplements.