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.