When is the best time to get a Whole Life Plan?

I've often heard of this phrase - the earlier you get the whole life plan the better it is for you. Rather than taking the notion for granted, I decided to find out for myself what are the basis of this statement, and whether it is valid or not. So here comes "Harry", and let's follow his life-span to see at which point in time is it the best for him to get a whole life plan.

When Harry is a newly born infant (i.e. age 0), his parents will only have to pay $103.65 per month for a $100,000, 20-year-limited-pay, whole life plan. Now the advantage of this is: assuming that Harry was born a normal, healthy baby then there would be no problems with his health condition. His parents will be able to 'lock-in' his health status and to hedge against any possible changes that the child might have in the future. Also, as we shall see, this would be the only time when the premiums are that low. Never again will the premiums be that cheap.

So maybe his parents did not think it was necessary at that point in time to get a whole life plan then - when Harry reaches 5-years-old, the premiums would be $120.00 per month. At 10-years-old, the premium would have increased to $138.40, and at 15 years the premium would be at $162.90. When Harry is 20-years-old, the premiums will be $177.50. By this time now, Harry will be on the verge of adulthood and on his way to join in the workforce. The irony is that people are usually at the poorest when they first started work, and 25-year-old Harry would have other uses for his income, rather than to take advantage of the $201.50 premiums. When he is more settled down at 30-years-old and starts preparing for the future, he finally decides to get the whole life at $234.50 per month.

Now let's just do a simple analysis. If Harry's parents had bought the policy for him during infancy, then they just have to pay $23,923 for $100,000 coverage. In comparison, if Harry were have to get it at 30-year-old, he would have to pay $54,113 for the same coverage.

However, the good thing about Harry is that his health condition remains constant. But this might not hold true for all people. I know of people whose children were already born with some health conditions, such as a hole in the heart. If that is not the case, then along the way one or another condition crops up. The National Service is a great time to find out all the 'hidden' health conditions, for it is during that time the recruits will be subjected to of health screening. Some of my clients were diagnosed during that time.

So, in essence, the phrase the earlier you get the whole life the better it is for you has some validity to it - in terms of the cost as well as the health conditions.

Reflections on Life

First and foremost let me offer my deepest condolences to the family of Dr Marcus Lim . I wish that they'll have the strength and courage to overcome this devastating triple loss of a son, husband and father. Life will be different, but life will go on.

I saw the news today ("Eye specialist drowns while on diving trip", The Straits Times, 26/10/2009), and I was sadden by the sudden loss of such a promising person. There was so much to be accomplish in his life in terms of his career (he had recently been awarded a National Medical Research Council fellowship by the Health Ministry) and family (he has a 3-year-old son and his wife was expecting their second child). But all these goals will have to be completed by those he left behind.

The news made me reflection upon life, and these are some thoughts that surfaced:

1) Never underestimate the Uncertainty of Life.

People always think that if one is doing something repeatedly, then the risks involved will diminished. For example, if you swim regularly then you can be considered a good swimmer and the chances of you drowning will be lesser. However, 42-year-old Mr Lee Wee Sing, whom is said to be a good swimmer, died after he competed in the swim leg of the OSIM Singapore Triathlon ("42-year-old man dies after competing in triathlon", The Straits Times, 02/08/2009). Similarly, Dr Lim was a competent diver, having had 7 years of diving expereince.

2) Always plan adequately for your family. Never assume that you'll always have the chance to do so.

When one pass away, it is your depedents whom will bear the greatest impact of the loss. Who else is going to care for your aging parents, and to look after the spouse and children that you leave behind? What sort of lifestyle changes are your family going to face? Did you give your spouse the option to spend time with the children to help them overcome the grief, instead of worrying about getting a job fast so as to feed them?

3) Always know where to go for help. Never assume that you'll never need them. Maybe you don't, but someone else you know might.

This article couldn't have been more conicidental. Just 3 days ago there was an article about the Wicare support group, which is a voluntary organisation that serves to help widows and their children ("Lauded for mission sparked by grief", The Straits Times, 23/10/2009). It is important for people know what avenues they can seek help and support from. If Mrs Lim ever chance upon my writings, I would offer to accompany her to Wicare. I hope this helps.

Child Education: When to start and for how much

I was reading the papers today when I came across a very interesting article ("Should pre-schools be 'nationalised'?" The Straits Times, 10/10/2009, Pg A38). The poignant point which was raised in that piece was the glaring disparity of childcare cost in Singapore. The upmarket pre-school establishments command a fee of more than $1000 per month, while the mass market ones charges around $520 per month. That works out to be at least $36,000 ($1000 per month for 3 years)for the former and $18,720 ($520 per month for 3 years) for the latter. The 'investment' in human capital is heavy indeed.

This article brings to mind one aspect of child education that has been routinely ignored by financial planners when discussing about child education. Usually the focus goes straight to saving up for the university education, which is about 18-20 years down the road. But the expense that is that coming in 3 years' time - when the child is going onto pre-school - is not being addressed.

So when should parents start planning for your child's education? The answer is you should start when you already have an intention to have a child. For those parents whom were 'blessed' by an unexpected pregnancy, you should start as soon as the pregnancy is confirmed. Ask yourself what sort of education do you want for your child and plan accordingly. Would you like to set aside $36,000 for the posh pre-schools or just $18,720 for the mid-range? If you start only when your child is born, you'll have 3 years to save.

Of course, not everything is measured by money - there are some parents whom choose to DIY (Do-It-Yourself). While I was doing my honours thesis in NUS, I researched upon a group of parents who do 'homeschooling' ("Homeschooling in Singapore: Education Redefined", Lim, 2009). These parents educate their children at home, and so they need not fork out additional money for pre-school. However, these DIY education aren't necessarily free - it comes with hidden costs, which is at the expense of one of their income. what happens is that usually one of the parents will have to give up their job to be a stay-at-home educator, and if you consider the loss of income then this might be a costly endeavor.

Basic Medishield vs Private Shield Plan

Recently a friend of mine showed me an article regarding the Basic Medishield Plan. Apparently the author argued that "the insurance that offers the best value for money is the basic Medishield offered by the Central Provident Fund", and he asserted that there are 3 reasons for that:

1) A private shield plan gives you 50% more coverage at the expense of a premium which is 100% more costly.

2)When the Basic Medishield plan is unable to pay for your medical expenses at a private institute, you can always choose to 'top-up' your medical bills using your savings.

3) The risk of the above (point 2) occurring is "likely to be quite low."

This issue brings to mind a real-life example of how limited the Basic Medishield Plan can be. Ms Chew wrote to the Straits Times lamenting that the Basic Medishield Plan paid only $1,438 of $50,000 hospital bill ("MediShield paid $1,438 out of $50,000 hospital bill", The Straits Times, 28/11/2006). There are a few crucial points which can be gleaned from her experience:

1) When it comes to seeking medical treatment, not everyone will have the luxury to analyze the cost of treatment and then to seek the most 'cost-effective' treatment. This is due to 2 reasons:

a) The inception of means testing means that even if one wish to choose the class C and B2 wards, one might not qualify for the 80% subsidy.

b) Another reason is due to the emotional aspect of preserving life. There are two other examples to illustrate this point. The parents of 12-years-old Marjorie Soh spent $400,000 in medical bills for her cancer treatment ("Girl, 12, dies after battling cancer for 6 years", The New Paper, 22/07/2009). Also, 4-years-old Charmaine Lim needed USD$350,000 in order to seek cancer treatment in New York.

The point is, does anyone have the capacity to haggle over the cost of treatment? Do you know exactly how much your medical bills are? If you don't, then the private shield plans - with the 'as-charged' feature - will offer a better package than the basic MediShield plan with all the limitations such as paying only a mere $270 for a 7-day treament cycle of chemotherapy! (in comparison with the hefty bills of the above cases)

2) This brings us to the second point. How much savings do you intend to part with in order to top-up the difference? Are you willing to pay $48,000? $100,000? How about your entire retirement funds?

3)The risk of incurring these medical bills might be low simply because one is not in the shoes of the first-party. The point is such risk can happen to ANYBODY, and when such calamity befalls an individual or family, the impact is 100%.

So, be wary of being "penny wise and pound foolish".

Deconstructing the Investment Linked Policy

I've been helping a client check out an investment linked policy, and here are two interesting points to help people make sense of investment linked policies:

1) What is an Investment-Linked Policy (ILP)?

Basically an ILP is a policy that combines term insurance with investment. Essentially ILPs consist of 2 parts:

A) a term insurance portion which gives you the insurance coverage and
B) the investment portion which would give you the investment returns.

There are two important features of ILPs:

A) For the term insurance portion you usually get a smaller sum assured than a 'pure' term insurance. For instance, one particular ILP derived its sum assured based on 4-5 times of the annualized premium. So if you are paying an annual premium of $1,200, then the sum assured will only be $1,200 X 5 = $6,000. Now compare this to a 'pure' term insurance. The same amount of $1,200 per year can get you a 30 year term insurance of (now go ahead, make a guess):

1)$100,000
2)$200,000
3)$300,000
4)$400,000


Have you made your decision? Good, now scroll down. :)


Yes $400,000! I hope you got the right answer. :) So the question is: why pay the same amount to get a fraction - literally 1.5% - of the coverage?

B) Unlike other types of insurance like whole life and endowment, ILPs have two distinct characteristics:

i) High rates of projected returns.

ILPs have higher rate of projected returns that range from 5% - 9%, while the whole life and endowment usually projects between a range of 3.25% - 5.25%.

ii) Do not have any guaranteed return.

ILPs DO NOT have a guaranteed return. Usually the returns for the whole life and endowment policies are broken down into the guaranteed and non-guaranteed portions (for illustrations do refer to my previous post on the term plans). This means that the ILPs do not have any guaranteed returns.

So what are the implications?

The implication for this is that you may get the professed returns on one hand, but on the other hand you might not get anything back (not even the initial amount you put in).

2) How to make sense of the benefit illustration (B.I.)? What do all the columns of confusing figures mean?

You can refer to this useful guide which explains the various columns in details.

The True Cost of Whole Life Plans

In my previous post I've written about the true cost of terms plans, which evoked a discussion and gleamed some important points. This particular post is to address 'the other side' of the spectrum - the whole life plans - and hopefully balance the bias.

Using the previous case study of the 26 year old male, I shall expound on it and determine what is the true cost of the whole life plan to him. Now, in terms of the cost, there are actually two types:

1) The 'actual' cost of the policy (i.e. how much he has to PAY for it).
2) The 'opportunity' cost of the policy (i.e. the value of the next best alternative forgone as the result of making a decision. In this case it is usually assumed to be better investment returns).

Now, if the insured were to purchase a limited-payment whole life policy rather than a term plan, his 'actual' cost would be $2,394.15, which is the annual premium.

On the other hand, if the insured were to purchase a term policy, his 'actual' cost would be $312.70, which is the annual premium.

So essentially there is a yearly difference of: $2,394.15 - $312.70 = $2081.45

In other words, the insured would have an excess of $2081.45 per year if he had opted for the term instead of the whole life.

Once we ascertain the excess, this is where the second aspect of cost comes in - the opportunity cost. Here it simply means what better use could he have for the $2081.45 - like for instance investing. If the insured uses this amount of money to invest for 30 years (put in $2081.45 for a limited-payment of 20 years and let the the amount accumulate till 30th year) at a range of hypothetical rates of returns, he will get back the corresponding amounts:

Annual rate of returns - Amount at the end of 30 years:

0.00% - $41,629
3.25% - $78,997
4.00% - $91,748
5.00% - $112,109
5.25% - $117,888
6.00% - $137,120
7.00% - $167,857
8.00% - $205,640

So that's quite a lot of returns from 'buy-term-invest-the-rest' huh? Whole Life can't match this. No way. Right, so let's see where the whole life stands.

Surrender Value of Whole Life - Amount at the end of 30 years:

0.00% - $55,300 (i.e. just the guaranteed amount)
3.25% - $76,540 (i.e. guaranteed of $55,300 + non-guaranteed of $21,240)
5.25% - $91,987 (i.e. guaranteed of $55,300 + non-guaranteed of $36,687)

If he were to surrender the limited-premium whole life at the 30th year, he will get back $76,540 (assuming an investment returns of 3.25%). So the 'buy-term-invest-the-rest' wins by a margin of...$2,457. After all the consistent work. For 30 years. The efforts are worth $2,457. No wonder they say that making money is tough. Phew.

Hey but if he were to have an annual returns of 5.25%, then the 'buy-term-invest-the-rest' will exceed the whole life by $25,901! Not too bad huh? So the only way to make his efforts worth it is to ensure that his investment returns is greater than 3.25%. Maybe 5.25%. Or even 8%. The best is 20% like Buffett. But whether Mr Insured can attain that - well that's a different story. If Mr Insured isn't that great at investing, and he gets 0% returns...well he might be better off with a whole life because he'll get $13,671 more.

So the true cost of whole life is not just the premium he have to pay, but also the possible opportunity cost of losing out on investments (we are talking about positive returns here ok...no he wouldn't lose his capital). Alright. Now go. Take the money and invest. He just have to make sure that he earns enough returns for his needs and efforts (easy, surely he can do much better than 5.25%). Oh by the way, he's got to ensure that he have at least $100,000 after 30 years - which is the sum assured he forgo to do the investment.

The True Cost of Term Plans

In the course of my work, I've met clients who claimed that term plans are better than whole life plans because they are 'cheaper'. Indeed, on the surface the premium of a term plan is much lower than that of a whole life plan. However, when I did a comparison of a term plan versus a limited premium whole life plan, I discovered that there is a catch to it: the term plan is only cheaper for a LIMITED period of cover, and not for LONG TERM coverage (as shown in Table A).



To do a proper comparison, I have set certain constant variables:

1) Profile of Insured: Male, Non-Smoker, 26 years old.
2) Sum Assured: $100,000
3) For the term plan (inclusive of Critical Illnesses cover) the intended coverage is for 30 years.
(I derived this from an actual case study, whereby this particular client only insured for 30 years because he perceived insurance to be necessary to cover his productive years, and that he has no use for it in his golden years.)
4) For the limited-payment whole life plan (inclusive of Critical Illnesses cover) the coverage will continue on till 99 years old (assuming there is no lapse in the policy).
5) That the annual premiums quoted are based on the present, level rate (discounting the possibility that the premiums might increase over the long-run).
6) There is no issue of buying the plans due to health problems.

So in all, the total premiums paid for the term plan over the 30 years of protection will be:
$312.70 X 30 years = $9,381.00

Now compare this to the total premiums paid for the limited-payment whole life over the 20 years:
$2,394.25 X 20 years = $47,883

That appears to be a lot right? But consider this fact - the term plan only covers for 30 years, while the whole life plan covers till 99 years old, which equals to 73 years of coverage.

Now, to obtain a "fairer" comparison, we should look at the cost per year of protection:

For the the term plan the cost per year will be:
$9,381.00 / 30 years = $312.70

For the limited-payment whole life plan the cost per year will be:
$47,883 / 73 years = $655.93.

So now although the difference is narrowed, no doubt the term plan is still HALF the cost of the limited premium whole life. But that's where the advantage ends. If you decide to change your mind and want to extend your term plan, the problems sets in.

1) For the term plan, the most you can extent is till 79 years old. Comparing it to the limited-payment whole life, there is a "self-insure" gap of 20 years.

2) The premiums for the term plan increase sharply from $312.70 to $3,481.00. Thus the total premiums he had to pay will be:

$3,481.00 X 22 years (from 57 yrs to 79 yrs) = $76,582.00

Thus the average premium he pays for the term plan over 52 years will be:

($9,381.00 + $76,582.00) / 52 years = $1653.13.

Now compare this with the $655.93 of the limited premium whole life. What is the true cost?