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.
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.
6 comments:
Purely from a monetary and health perspective, it is true.
However, there is one main difference:
The one paying the premiums, hence, affordability.
This has also to be seriously considered as a factor. if budget was a concern, it is more important for the parents to insure themselves first than their child.
many parents often neglect to review their own coverage first before purchasing for their child.
That being said, if you know to invest your money ($103.5) and get an annual yield of at least 12%, you will be getting more than $100k after 12 years!
To get more than $100k for $120, all you need is an annual yield of at least 11%.
to get more than $100k for $234.50, all you need is an annyal yield of at least 6%
Moreover, the $100k still has the potential to go up.
dear ms jade,
please accept my compliments for an excellent article!
to me, i consider a limited premium whole of life plan, the best life insurance product available to consumers.
one of the greatest advantages that come with a limited premium whole of life plan, and what i term as the risk of future affordability being greatly marginalised with the specified shorter or shortest time horizon on the liability of paying future premiums.
the other long-term benefit is the whole of life plan effectively addresses longevity risks (provided there is no expiry or maturity date on the coverage of stated benefits (excluding tpd which usually expires at age 65/66).
in other words, the whole of life plan is a 'pow chiak' product whether u survive and live to a ripe old age (100 years and beyond) or die prematurely. what a whole of life plan translates to is a 'sure-can-claim' plan unlike term or even regular premium ilp products where there is greater uncertainty with staying insured (future affordability of paying premiums) or even surviving beyond the term of the plan.
just my 2 cents' worth.
with my best wishes.
Dear Anonymous,
I agree with you that if you know how to invest your money at that various rates of return, then you'll be getting more than $100K. However, the point you miss out is that insurance and investment are not the same thing. If you need to claim in the second year, it means that by paying $1,242 you get a 'returns' of $100K. Maybe you can let me know what is the rate of returns here? 2000%? :)
The most common misconception that people have, is that they treat insurance and investment as the same thing. However, this is a fallacy. Insurance covers risk. In times of need it provides you with the money that you do not have. Or even if you do, you'll rather use it for your investment or retirement. ;)
Dear Anon,
The rate of return is 8000%, not 2000%. Sorry for the typo.
Dear Patrick,
Thank you for your kind compliments and for sharing your insights. I concur with your views, and think that the limited-whole life does have more pros than cons. :)
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