Insurance & Costs of having and raising a child

[Stephen]

Hi Stephen,

Sense you are quite new to the field of personal finance; so let me provide some notes

1) 'whole life is a similar to bonds"
This is a definite no, while the payouts are smoothed out to reflect bond like payouts, the way whole life's funds are invested is not. A typical whole life fund invests in many components: 1) Bonds, 2) Stocks, 3) Buildings (getting rental from tenants), 4) Loans, 5) Cash. Commonly, the actual weight age of each component is approx 50%, 26%, 10%, 8% and 6% respectively. 2) and 3) are subject to market volatility and therefore 36% is subjected to "market volatility".

If there is volatility, why then are insurers able to pay bond like payouts, two reasons: a) they smooth out the returns and b) they publish very low "non guaranteed returns".

Generally the average returns of plain bond funds is 4-6% p.a. Furthermore, insurers do not just invest in sovereign bonds but in corporate bonds which offer higher returns (3 %to 7%) For simplistic sake of this post; let's set bond returns at 4.5% p.a. Stocks at 7.5% p.a , Building and loans at 6.0% p.a and cash at 1.2% p.a. These numbers are realistic and reflects with a high degree of accuracy the long term annua returns of each asset class. Therefore, the weighted return of this whole life fund is 5.35% p.a. However, it is ironic the non-guaranteed returns published in whole life insurance is 4.75% p.a.

2) The 3.25% or 4.75% Insurers publish are not the actual return figures you get
This is true, because in the first few years you get nothing. My calculations is that if insurers pay you the high end projections; the returns is only 4.2%. But so far only one insurer has been paying the top range of the projected. So therefore whole life insurance returns probably average 4% for policyholders (ironically its the same rate as CPF SA interest rate).

In addition, they mention it is not guaranteed, therefore they are not obligated to pay you the amount (even the 3.25% projection). Why? This is because market volatility may screw them up if a downturn lasts for 50 years despite their adequate buffer of approx 1.35% p.a.

3) Insurance money is locked up with insurers and you cannot use the money during financial duress unless you die. While the method of "ir" grants you the flexibility.

4) Term only covers you till 65 while whole does till 99.
This is mainly due to the effects of compounding of the premium differentials between term and whole policies. The insurers have made enough money between giving you 4% returns and 5.35% to provide adequate coverage.

5) You mentioned the 1% p.a. returns is not much difference. In fact, it makes hell lots of difference as what yeokiwi has calculated. This is due to the magic of compounding. Open an Excel sheet and churn an initial sum of $5,000 at 4% returns and 5% returns over a 95 year period. You will be surprised at how large the difference is. Insurers know this and that is why the approx 1.35% they make over your lifespan is billions of profits to them.

6) lastly, given all this info, I will like to say that your 3% discount rate is way too low and should be set at 4-5% because your time frame is long and CPF SA already offers you 4% returns and many good quality corporate bonds of long durations are above 4%. e.g. Stan Chart bonds are at 4.5%

Hi CY09,

i really appreciate your reply

I guess u are refering to NTUC income in 2).

My post is just refering to the sum assured 100k coverage only, not considering the rate of return of the Cash Value of the whole life.

Yes i understand the magic of compounding but i used 3% instead of 4-5% . At 4-5% definitely is a larger difference. Yes, i could easily have gotten a dividend yield of ~4% with a stab at ST engineering , SPH , SIA engineering and keppel especially now with the amount mentioned. Not corporate bonds like standchart though with 200k or 250k a pop or 125K if I take a LTV of 50% and juice the returns higher. No insurance will cost so expensive hehe. Retail bonds ok but bonds will mature and need to find a way to reinvest it, transaction fees will eat into it.

As mentioned in the previous post addressed to Yeokiwi, i need to find out more about this whole life quoted like annual bonus, terminal bonus, cash value. I just have the impression last time that whole life insurance is massively lousy but now its just marginally lousier if use 3% and ok lousy if use 4% when just talking about sum assured coverage only.Cash value i have still yet to ask about.

You mentiond about whole life insurance averaging returns of 4% in terms of cash value ( i heard some is 2.5%) and im ok with 4% as i can just treat it like a bond portion in my baby's portfolio that includes stocks that i am already buying for him as a form of diversification. I really need to find out more as mentioned and do some excel.

I hope i am clear that i am just comparing sum assured 100k coverage. Have not considered the cash value of it at 65 years or after to find out the returns %.

Please tell me if i sound confuse. I am really receptive of feedback constructive or non-constructive as i want to learn and today i learnt about a website called portfolio visualiser so i am paying it forward. Go google it to backtest your portfolio.

EDIT: Ok guys and gals, after rereading and rereading to the kind peeps who replied to me CY09, Yeo kiwi and NTL , i think Term is better. Thanks for your patience!

[angtc11]

this policy is more for her to "take over" when she comes of age; hence I view it as my daughter being able to hit 18 and beyond and then use the policy to cover herself when she starts work in case something happens to her (then HER family may need her income then and the policy can pay out a lump sum).

If indeed her future family needs her future income she would be better off with TERM insurance and not whole life insurance for the same reasons as you. With the whole life policy you bought, the coverage will not be meaningful unless you are paying an astronomical sum in premiums.

I was actually of the view that term life insurance, although it has a high coverage, is actually an expense and you cannot recover anything from it. Unless you expect to die or fall ill from major illnesses, there's nothing much which can trigger the "windfall" gain. Perhaps this thinking is flawed, but so far I have not come to the point of giving up my existing life policies and investing it all in term. Term insurance also steps up in 10-year age brackets, and becomes prohibitively expensive as one gets older. Alternatively, you can choose depreciating coverage with a fixed premium (similar to an amortizing loan), but the effects are still the same.

It is absolutely correct that term life insurance is an expense. Technically ALL insurance is an EXPENSE. Insurance is basically a bet you make with your insurer that you will trigger the policy (die/get cancer/etc) within the policy period. It is a bet you want to LOSE because if you "win" it means you actually lost i.e. you died, got cancer or whatever.

The fact of the matter is that when you pay the premium for a whole life policy, a portion of the money is paying for the actual life insurance. That portion is an expense and is lost forever. The balance is invested on your behalf. Over time the investment returns cover up the expenses paid for the life insurance, and you appear to be getting your money back. In other words, when you pay $1 for whole life insurance, maybe $0.05 is buying the life insurance (and is an expense, lost forever), and $0.95 is invested for you. Eventually the $0.95 grows to $1 and beyond, and presto! You think you are getting your money back.

Life insurers have chosen to confuse the issue by combining investment with insurance to create "life" policies because the consumers are misled into thinking they can "get their money back" and are thus more willing to buy the policy. Life policies are ENORMOUSLY profitable for insurers because on top of the premiums for the life insurance, they get money to manage, for which they charge management fees. And for non-participating policies, the insurers take all the profits in exchange for guaranteeing a low rate of return.

With normal unit trusts, you can redeem your money if the manager does badly, so the manager is under pressure to do well. With a life policy your money is captive - the insurer doesn't have to work as hard to invest properly because there is very little chance of the policy being canceled, since policyholders don't want to lose their insurance coverage.

Insurance gets more expensive as you get older because you are more likely to die from illness and less likely to recover from accidents. This is true for both term and whole life insurance, because fundamentally both incorporate the same insurance component. It's just that whole life policies hide the insurance component from view.

Purchased a Term Policy for myself which covers me for about $300,000. I do intend to increase this in future if my income level increases and I have more savings.

You should always buy insurance to cover your NEEDS. It has nothing to do with your INCOME. If you need $300k to bring up your daughter then buy $300k of term life insurance on your life. This is true whether you earn $50k or $200k a year. Don't buy term life insurance "for yourself" - because if you die the money gets paid to your ESTATE which can take months to settle. Buy term life on YOURSELF but with YOUR WIFE as the beneficiary. That way if you die your wife gets the money pronto.

Alternatively, you can choose depreciating coverage with a fixed premium (similar to an amortizing loan), but the effects are still the same.

It is more efficient to buy reducing term insurance, because if you die when your child is in her final year of university, there's only 1 year of expenses left and there's no need for the full $300k. If you are kiasu about inflation then add a 50% or 100% buffer. With declining term insurance the premiums are very cheap so you should be able to get double the coverage for the same money as normal term insurance.

Insurance is bought to offset an economic loss. Since you have only one dependent you only need to buy enough life insurance on yourself to see HER through graduation. Your mortgage should already have its own mortgage insurance so there's no need to worry about that. Your wife can work so you don't need to provide for her.

Take a hard look at the numbers and it will be obvious that investing the difference will leave you better off unless you are totally incompetent at investing AND do not have the discipline to invest in an index fund. If you are a competent investor you will easily beat the insurer. If you invest in an index fund you will probably still beat the insurer since your costs are lower. Since your daughter is only 2 years old you have over 15 years before you need the money. That is a great time horizon to be investing in stocks.

Hi peeps,

My baby is due dec so bringing up this old thread. I understand the rationale of BTIR and the concept of insuring economically active people who has dependents, therefore i have up-ed my insurance with term.

I initially did not want to insure my baby for death/TPD/CI as i thought its a waste of money as money saved can be invested and he has no dependents (Of cos i will insure him for H&S insurance as thats vital), till an agent told me that if he were to get a medical condition during the early years, say diabetes, he may not be able to be insured when he is economically active or otherwise insured with pre-existing conditions. This i agree, so just to reduce this risk, i planned to get one, and set my mind on a term insurance, thinking its cheaper and that i can invest the rest for my baby.

I was quoted for a sum assured of 100k Death/TPD/CI, accelerated benefits
Option 1-Term: $220 pa from 1 year old till 65 years old. Term coverage till 65 years old only.( total outlay till 65 is 65 x $220= $14300)
Option 2 - Pay 5 year Whole Life insurance: $1751 pa for 1st 5 years only. Thereafter, TPD till 70 years only and Death/CI will be till 99 years old.( total outlay is 5x $1751= $8755)

Even after calculations using time value of money, It seems to me pay 5 years whole life is vastly more superior as my baby( or rather his claimants) will definitely get back $100k as death is a certainty when its covered till 99 years.

Could i have an opinion on this as i may be missing out on something as i do feel whole life is better in this case?
Or are insurance companies increasing the premiums for term just to level the competition?( term is AXA term protector by the way)

(i have considered SAF aviva and NTUC LUV which are both group policies but it doesn't work for me as it covers till age 17 or 21 years as a dependent and therefore, he has to get his own SAF/LUV which he may not be able to if he had a medical condition before that. Worse is if he get diabetes, no payout that can be invested to cover his future need and yet precluded from future insurance)

Hi Stephen
For LUV plan, although the dependents need to get their own insurance when policy holders die or when the insured come of age, there should be no need for underwriting again. As such there is no risk of not being able to continue under the same terms. Do reconfirm with ntuc before buying though.

[Stephen]

this policy is more for her to "take over" when she comes of age; hence I view it as my daughter being able to hit 18 and beyond and then use the policy to cover herself when she starts work in case something happens to her (then HER family may need her income then and the policy can pay out a lump sum).

If indeed her future family needs her future income she would be better off with TERM insurance and not whole life insurance for the same reasons as you. With the whole life policy you bought, the coverage will not be meaningful unless you are paying an astronomical sum in premiums.

I was actually of the view that term life insurance, although it has a high coverage, is actually an expense and you cannot recover anything from it. Unless you expect to die or fall ill from major illnesses, there's nothing much which can trigger the "windfall" gain. Perhaps this thinking is flawed, but so far I have not come to the point of giving up my existing life policies and investing it all in term. Term insurance also steps up in 10-year age brackets, and becomes prohibitively expensive as one gets older. Alternatively, you can choose depreciating coverage with a fixed premium (similar to an amortizing loan), but the effects are still the same.

It is absolutely correct that term life insurance is an expense. Technically ALL insurance is an EXPENSE. Insurance is basically a bet you make with your insurer that you will trigger the policy (die/get cancer/etc) within the policy period. It is a bet you want to LOSE because if you "win" it means you actually lost i.e. you died, got cancer or whatever.

The fact of the matter is that when you pay the premium for a whole life policy, a portion of the money is paying for the actual life insurance. That portion is an expense and is lost forever. The balance is invested on your behalf. Over time the investment returns cover up the expenses paid for the life insurance, and you appear to be getting your money back. In other words, when you pay $1 for whole life insurance, maybe $0.05 is buying the life insurance (and is an expense, lost forever), and $0.95 is invested for you. Eventually the $0.95 grows to $1 and beyond, and presto! You think you are getting your money back.

Life insurers have chosen to confuse the issue by combining investment with insurance to create "life" policies because the consumers are misled into thinking they can "get their money back" and are thus more willing to buy the policy. Life policies are ENORMOUSLY profitable for insurers because on top of the premiums for the life insurance, they get money to manage, for which they charge management fees. And for non-participating policies, the insurers take all the profits in exchange for guaranteeing a low rate of return.

With normal unit trusts, you can redeem your money if the manager does badly, so the manager is under pressure to do well. With a life policy your money is captive - the insurer doesn't have to work as hard to invest properly because there is very little chance of the policy being canceled, since policyholders don't want to lose their insurance coverage.

Insurance gets more expensive as you get older because you are more likely to die from illness and less likely to recover from accidents. This is true for both term and whole life insurance, because fundamentally both incorporate the same insurance component. It's just that whole life policies hide the insurance component from view.

Purchased a Term Policy for myself which covers me for about $300,000. I do intend to increase this in future if my income level increases and I have more savings.

You should always buy insurance to cover your NEEDS. It has nothing to do with your INCOME. If you need $300k to bring up your daughter then buy $300k of term life insurance on your life. This is true whether you earn $50k or $200k a year. Don't buy term life insurance "for yourself" - because if you die the money gets paid to your ESTATE which can take months to settle. Buy term life on YOURSELF but with YOUR WIFE as the beneficiary. That way if you die your wife gets the money pronto.

Alternatively, you can choose depreciating coverage with a fixed premium (similar to an amortizing loan), but the effects are still the same.

It is more efficient to buy reducing term insurance, because if you die when your child is in her final year of university, there's only 1 year of expenses left and there's no need for the full $300k. If you are kiasu about inflation then add a 50% or 100% buffer. With declining term insurance the premiums are very cheap so you should be able to get double the coverage for the same money as normal term insurance.

Insurance is bought to offset an economic loss. Since you have only one dependent you only need to buy enough life insurance on yourself to see HER through graduation. Your mortgage should already have its own mortgage insurance so there's no need to worry about that. Your wife can work so you don't need to provide for her.

Take a hard look at the numbers and it will be obvious that investing the difference will leave you better off unless you are totally incompetent at investing AND do not have the discipline to invest in an index fund. If you are a competent investor you will easily beat the insurer. If you invest in an index fund you will probably still beat the insurer since your costs are lower. Since your daughter is only 2 years old you have over 15 years before you need the money. That is a great time horizon to be investing in stocks.

Hi peeps,

My baby is due dec so bringing up this old thread. I understand the rationale of BTIR and the concept of insuring economically active people who has dependents, therefore i have up-ed my insurance with term.

I initially did not want to insure my baby for death/TPD/CI as i thought its a waste of money as money saved can be invested and he has no dependents (Of cos i will insure him for H&S insurance as thats vital), till an agent told me that if he were to get a medical condition during the early years, say diabetes, he may not be able to be insured when he is economically active or otherwise insured with pre-existing conditions. This i agree, so just to reduce this risk, i planned to get one, and set my mind on a term insurance, thinking its cheaper and that i can invest the rest for my baby.

I was quoted for a sum assured of 100k Death/TPD/CI, accelerated benefits
Option 1-Term: $220 pa from 1 year old till 65 years old. Term coverage till 65 years old only.( total outlay till 65 is 65 x $220= $14300)
Option 2 - Pay 5 year Whole Life insurance: $1751 pa for 1st 5 years only. Thereafter, TPD till 70 years only and Death/CI will be till 99 years old.( total outlay is 5x $1751= $8755)

Even after calculations using time value of money, It seems to me pay 5 years whole life is vastly more superior as my baby( or rather his claimants) will definitely get back $100k as death is a certainty when its covered till 99 years.

Could i have an opinion on this as i may be missing out on something as i do feel whole life is better in this case?
Or are insurance companies increasing the premiums for term just to level the competition?( term is AXA term protector by the way)

(i have considered SAF aviva and NTUC LUV which are both group policies but it doesn't work for me as it covers till age 17 or 21 years as a dependent and therefore, he has to get his own SAF/LUV which he may not be able to if he had a medical condition before that. Worse is if he get diabetes, no payout that can be invested to cover his future need and yet precluded from future insurance)

Hi Stephen
For LUV plan, although the dependents need to get their own insurance when policy holders die or when the insured come of age, there should be no need for underwriting again. As such there is no risk of not being able to continue under the same terms. Do reconfirm with ntuc before buying though.

Thank you angtc for the tip. Yes I will reconfirm

[CityFarmer]

I appreciate the spirit of sharing in this thread. You all have make VB more meaningful.

Thanks you

Regards
Moderator CF

[NTL]

Went thru quickly the policy terms for LUV.

http://www.income.com.sg/forms/insDocument/LUV.pdf

Few things for you to take note if you taking up the plan.

1. Policyholder is Income... They can terminate the policy anytime, by giving you 3mths notice.

2. There is no mentioned of no-need of underwriting when dependents take up a new policy with Income.

3. You may want to clarify clause 5.4 too.

Generally, I don't like an insurance policy that is not owned by me. I prefer to be the policy holder, the controlling party, rather than let others decide.

[NTL]

Hi Stephen,

Why more worth it when pass away before 87/88?

Without going thru calculations, what I see are the following scenarios:

1. From 1 to 40, without calculating time-money value, you pay less premium for insurance, so term should be more worth it, and also add back your bond investment.

2. From 40 to 65, your bond investment should be able to offset the premium paid during the period, so term should still be more worthwhile

3. From 66 onwards, if buy term, you left with the bond investment, which based on your calcuation, will hit $100k at age 87/88. So from 65 to 87/88, maybe wholelife will be more worthwhile. Thereafter, buying term will be more worthwhile.

So I guess whole life only give an advantage for the 20 odd years from 65 to 87/88?

Anyway, since you looking at buying term, why don't consider one that cover up to 99yr old? Then the coverage will be same as that of the whole life plan.

Disclosure: I had recently bought whole life plan for my 2yr old, but the plan includes early CI cover until he pass away. The plan does not stop at age 99.

NTL you are right about the different age bands. Could you share how much sum assured and premiums u paying?and possible the company too?

I chose 65 because after that baby should have retired and dependents are working

I won't know when will our kids be retiring in the future. With longer lifespan, and potentially higher loans, they may have to work longer.

The plan I bought for my 2yr old is from TokioMarine. Premium is $20XX for 5yrs. Covering $100k life/tpd, $50k CI, and $50k early Ci on acceleration basis. I bought it more like a gift, than any financial reasons. I want to give him something that can last him a lifetime. So, I didn't really go and do all the calculations. Sometime, somethings just dont make financial sense. Just do it.

[Stephen]

Hi Stephen,

Why more worth it when pass away before 87/88?

Without going thru calculations, what I see are the following scenarios:

1. From 1 to 40, without calculating time-money value, you pay less premium for insurance, so term should be more worth it, and also add back your bond investment.

2. From 40 to 65, your bond investment should be able to offset the premium paid during the period, so term should still be more worthwhile

3. From 66 onwards, if buy term, you left with the bond investment, which based on your calcuation, will hit $100k at age 87/88. So from 65 to 87/88, maybe wholelife will be more worthwhile. Thereafter, buying term will be more worthwhile.

So I guess whole life only give an advantage for the 20 odd years from 65 to 87/88?

Anyway, since you looking at buying term, why don't consider one that cover up to 99yr old? Then the coverage will be same as that of the whole life plan.

Disclosure: I had recently bought whole life plan for my 2yr old, but the plan includes early CI cover until he pass away. The plan does not stop at age 99.

NTL you are right about the different age bands. Could you share how much sum assured and premiums u paying?and possible the company too?

I chose 65 because after that baby should have retired and dependents are working

I won't know when will our kids be retiring in the future. With longer lifespan, and potentially higher loans, they may have to work longer.

The plan I bought for my 2yr old is from TokioMarine. Premium is $20XX for 5yrs. Covering $100k life/tpd, $50k CI, and $50k early Ci on acceleration basis. I bought it more like a gift, than any financial reasons. I want to give him something that can last him a lifetime. So, I didn't really go and do all the calculations. Sometime, somethings just dont make financial sense. Just do it.

Hi NTL,

Thanks for sharing the premiums cost with me. I assume it's $20xx pa for 5 years.
You are right, it's a gift and who knows retirement will be longer.

About the LUV, yes the group thingy puts me off and also, premiums change according to age band and it clearly states premium can be changed any time. The AXA is fixed premium so no shocks in future as verified by the CSO. Think I better get it black and white.

[brattzz]

anyone can intro/brought prenatal insurance for wife and kiddo?

Was looking at AXA/PRUD/GE, it's linked to ILP which is no-no for me, left GE's Flex-maternity cover - single premium type,

would appreciate any comments/experience sharing!

[yeokiwi]

anyone can intro/brought prenatal insurance for wife and kiddo?

Was looking at AXA/PRUD/GE, it's linked to ILP which is no-no for me, left GE's Flex-maternity cover - single premium type,

would appreciate any comments/experience sharing!

I did not buy any insurance but I think there wasn't any during my time.
I thought Medishield currently covers both congenital and neonatal conditions and therefore, a specific coverage insurance is not as useful.

Besides insurance, it is better to mentally prepared to send wife to government hospitals for premature birth or possibility of neonatal complications even though one has already booked a private hospital suite.
The cost of treating any kind of neonatal condition in private hospital will be very exorbitant.

[valuebuddies]

Perhaps you should look at Prulink from Prudential, it's not ILP and it covers from prenatal complications to congenital conditions right from 1st day of birth and maybe converted to hospitalization plan for the baby. I think the preggie can buy Prulink before reaching 32 weeks of pregnancy if my memory doesn't fails me, and it has different amount of coverage for monthly premium of $100, $200 and $300 iirc. My wife and I once considered it as we were so worried on the medical costs on prematured delivery. But somehow we did not proceed maybe I don't really believe in insurance.