Random Post: Whole Life Policy Pushed by Random Agent

Had a recent meeting with an insurance agent who tried to sell me a whole life policy, insisting that it was better than a term policy as, "This will cover for your whole life in case you get sick at 80, 85, 90. Also, wouldn't you want to make sure that money is left for your descendants?" Most irritatingly, he kept claiming that "rich people buy these plans all the time, and if the plans were bad would rich people buy them?"

I found these reasons unconvincing. Firstly, the returns for the whole life plan was pathetic, with guaranteed returns coming in at $50k for approx $21k total premiums paid (premium payment stops at approx age 45). There was a non-guaranteed portion which at the high end would have given $70k extra (at age 90), but the agent admitted that those projected returns were best case scenario and highly unlikely to be achieved. Let that sink in. At age 90, the BEST possible returns were approx $120k for an approx 600% returns. AFTER 45 YEARS OF COMPOUNDING. And we're supposed to pay management and distribution fees for such crappy performance!??? I told him straight I could do way better than this for him without charging any fees just by passively investing in low cost ETFs.

Secondly, the policy cost ~$1800 per annum for a coverage of $125k for either whole life or till age 120 (my mistake, I did not clarify on this). Not only is this way too expensive for the coverage, from the attached chart, we see that the typical period of our lives in which we need the most coverage is somewhere in the middle, approx 30s to 60s depending on the age you have kids. This is the period where the kids are young, and the parents old, and we'd have to obtain sufficient coverage for both in case something happens to us (touch wood!). And this plan would provide way too little coverage for that period.

Furthermore, the period of which zero to minimum coverage is needed is at the tail-end of our lives (approx 70s-90s), as parents (barring those super long lived immortals) shouldn't be around anymore, and the kids (barring those no-good devil-spawn offspring) should be all grown up and no longer dependent. But this was exactly where the agent said we'd be reaping the most rewards from the whole life policy, ie the benefits would only kick in when we need it the least! This is also the reason why I am not a fan of the new Prudential Term plan that purports to have a coverage till the age of 100.

All in all, the whole life policy pushed by the agent was 

a) too expensive
b) did not provide adequate coverage when I need it the most
c) provides too much coverage when I don't need it
d) shitty returns which far lags the market averages

Insurance Needs

Readers of most Singaporean financial bloggers would have had their own ideas on insurance, with the mantra of most of them (including me) being Buy Term, Invest the Rest. However, there are still many financial consultants (I prefer to call them insurance salespeople) out there who still insists that Whole Life Policies (WLPs) are relevant. We'll take a short look at these in this post.

Whole Life policies are policies that offer the insured a cash value upon the maturity of the policy, which insurance companies will tout as being better as buyers can be protected while getting a potential windfall at the end of the policy. This is false. What WLPs provide is protection at a much higher cost, as premiums are split into protection (the actual insurance), and investment, which further splits into participating fund fees, commission for the agent and of course the sum of money placed in the participating funds. These "investments" are projected to come in at 3.5% - 5%, which are actually quite bad, given that purchasing WLPs means a solid commitment in the time frame of decades. One could easily buy a low-cost ETF, such as the SPDR STI ETF, which has a 15 year return of 7.28% per annum. 

When you mention this however, the agent is likely to say things about how WLPs give you protection at the same time, and not everyone has the same risk appetite. To this, I say BULLSHITTTTTTT. Firstly, WLPs give you very little coverage for the amount you pay, as compared to a term life policy. For a real life example, I'd bought a WLP from my agent when I first started working, and was unfamiliar with investing. Total cost per annum was $2,400, for a coverage of $150,000, albeit I only had to pay the premiums for 20 years. Contrast this with a term life policy I bought with the same agent 3 years later. $2,100 per annum for $500,000 worth of coverage, albeit I'd have to pay for as long as I wanted the coverage. As to which plan is more worthwhile? I'll leave it to you to decide. 

Next, risk appetite. What's more risky than buying into a product of which the fees are so high, that the fund managers would have to outperform the market every year to even ensure that your money is not being eroded away? Also, if its equity risk that you're afraid of, there's a convenient Bond ETF in SGX, composed solely of government and stat board bonds, which are as safe as they come.

My point is, don't be taken in by these insurance salespeople who are introducing you WLPs only to line their pockets, and to secure their "incentive trips" paid for by their companies (using our money of course). Their arguments do not hold water. Much better to buy term, and invest the rest.