Wednesday, August 31, 2016

What's with the rant against whole life plans?

I bought a whole life plan. In fact, 2 of them. One is a traditional whole life, where you pay until forever. The other is a limited payment whole life, where the payment period is condensed to maybe 5, 10 or 15 yrs, so you pay a higher amount but you can stop paying after.


There's so much vitriol against whole life that I thought I should make some statement FOR whole life, just to provide some yin to balance out the yang. The ultimate question is this: Will I buy a whole life plan now? The answer is no, but back then, I didn't know the following:


1. I'm a mighty saver. I can save a lot of my income away without external help. I know some people will spend a lot of their income away, so a whole life plan helps to 'lock up' that excess money away and give it back much much later. It's not ideal of course, but between a rock (not saving) and a hard place (not earning good returns on money), I think there needs to be a compromise. I know the rhetoric of buying term and investing the rest. But I think there is a group of people who will buy term and spend the rest. Whole life will help them a lot in this aspect. Back then, I didn't know which group I am in, but now I know. It's my hedge against my own 'money' character, if you will.

So, buy term invest the rest...but in real life, you might not save the rest. Nor invest it.


2. I can earn a respectable returns myself from investing. The second part about buying term and investing the rest is the investing part. Some people don't want to touch investment instruments at all, except perhaps for insurance and savings deposit. Not even bonds are under their radar. It could be ignorance, or fear or more likely a combination of experiential baggage that causes one to think like that. I'm sure you've heard of ultra conservative people like that. If so, then whole life presents a good investment for them. It might not be good enough for you, but it could be so for them. I don't buy into the idea that if you invest in a low cost fund, things will work out well for you. The stock market returns are never guaranteed. Nobody can guarantee you will earn 1% from the stock market if you put in for the long term. On the other hand, I've never heard of people losing money in whole life insurance, have you? The criticism is that one can earn better than whole life, but perhaps they forgot to mention they could have lost money in the process too.

So, buy term invest the rest will beat whole life returns, but that outcome is not guaranteed. A small guarantee might work better for an non-guaranteed but higher return.


3. I am disciplined. I think that sums up the characteristic of a term plan buyer. If you want to buy term plan, you better be disciplined in your spending and also your investments. If not, it's likely to reap the benefits of a buy-term-invest the rest strategy. It's like hiring a trainer for your gym. Can you do it yourself? Sure, all the information is out there, you just have to read and learn it on your own and execute it. But there will be days when you're not motivated and you just need someone to push you so that you can overcome the barrier. For a fee, of course. Not everyone is interested in financial and insurance matters and will gladly outsource it to others.



What I'm trying to say is that the process of discovering yourself takes time. In the meantime, you still have to work out the best decision based on the available information. Back then, my idea is to use whole life as a base and buy term to top up the coverage. When the term expires at 60 or 70, the whole life will still continue to provide coverage. I will then have to option to convert my whole life to annuity, cash out for retirement needs and/or continue the plan and provide a gift for dependents. Ironically, because of my whole life plan 'mistake' that everyone around me keeps telling me, I went to dig further into investment. I would say the 'mistake' started everything I know about financial stuff.

Interesting isn't it? Nothing is really 'wasted' in nature.

My philosophy now goes towards using term and self insurance. From whole life, to limited payment whole life, to term and to self insurance, I think I'm evolving just like a pokemon. I think life experience and mistakes are the candy needed to evolve yourself into a stronger pokemon with more CP lol!


6 comments :

Derek Lim said...

Hi LP,

Thanks for the post. I also feel that Whole Life plans are unfairly put down. I also have two Whole Life plans - a traditional whole life plan when I was thirteen and a fairly recent 25 year limited paying plan in 2008.

2008 is right in the middle of the sub prime crisis. Although I have read a lot on BTIR (Buy term invest the rest), as a 20 something having seen his portfolio fallen by half, I am not really optimistic of my returns in 20 to 30 years time. If I failed to make money and my term insurance expires, I may not be able to be re-insured. A limited whole life offers a fairly attractive proposition - pay for 25 years and be insured for life. Granted premiums is slightly higher but it gives me a certain piece of mind.

"Invest the rest" is also not a simple task. Investors spend many hours analysing companies, tracking their portfolios etc. While many will beat the insurance returns, there will also be a fair share who will not.

My advice is although premiums is an important factor when deciding between a term and whole life, it should not be the only factor.

Sillyinvestor said...

Hi LP,

I also have 2 life plans. I cannot claim ignorance is youth, I only bought the second one 2 weeks ago, I paid but it is not in force yet because I am going through some Heath checks.

I have wanted to increase my CI coverage. So I ask my sis to show me term plans. I ASSUME my sister would not try to con me. She show me 4 term plans and 4 life plans.

After comparing and thinking hard, I choose the life plan with an bonus coverage till 70 of 300% of basic coverage. So I have 150k coverage until 70 and then 50k from 70 till I die. By 70, my son will be close to 40. Hopefully is no longer a dependent. As for myself, after 70, I think my total coverage of 100k and savings and hospital plan should last me enough to go. After 70, should be easier to die if I kena CI, parts all old Liao LOL. I also paid a premium for advance coverage.

My policy with the hefty rider will break even after 20 years. So 20 years later, I am cover for free till 70 at 150k and thereafter 50 k till I die. I only need to pay my policy for 25 years. If I kena CI earlier than break even years, of course I get a "lots of money" back but I hope it never happen to me.

Term policy stops at 75 oldest. I dun know why. Maybe my sis has been "selective" in what she show me. Also, while the premium is much lower, I either go for 100 k coverage or 200 k coverage, if I go for the later, the difference in premium is then not very significant in my eyes. So all in all, I find the life plan more attractive.

I am also not very confident of my investing prowess. I think I can beat inflation and have returns of 3-4%, but I am not sure how much cash will be tie up for how long during bear market. So I rather play it safe if ever I kena CI that need plenty of cash to recuperate.

I very iron teeth hor?

la papillion said...

Hi Derek,

Thanks for chipping in :) You gave very balanced views on your own purchase of whole life plans. I agree with you - that peace of mind cannot be put down to a number. I think we're born out of the bear market, so our mentality towards investment is going to be different from those born out of the bull market. Not all investment journey will go well, and I understand it by experiencing it myself.

la papillion said...

Hi SI,

I think only you know your situation the best. I don't think a single strategy is applicable to everyone. I think I'm mimicking your strategy of having staggered coverage, but I'm doing it by buying different policies (didn't know got such a plan, or maybe not out yet). I think the staggered approach is the best, because our needs varies across the different life stages, so we need to step up and step down at different times. I don't think you're iron teeth, I might have done the same in your situation!

Singapore Man of Leisure said...

LP,

Thank goodness you chimed in!

Your post is just the cover for me to resurrect my 5 year old post on this whole-life versus term debate:

Term or Whole-life insurance?

I don't see anything wrong with whole-life too. Like brandy, it works best as a blend ;)

I surrendered my whole-life last year December. The cash serves as a very useful ballast to steady my portfolio against stormy weather up ahead.

My biggest beef is with insurance for child.



la papillion said...

Hi SMOL,

Wow, so fast 4 yrs flew by?

Haha, I've no beef with anyone, you happy I happy :) But you're right, as I get older, I realised the world isn't black or white. It's always 50 shades of grey ;)