Insurance & Costs of having and raising a child

[Musicwhiz]

I belong to the latter category, and that was why I knew how compounding interest rate worked for the BANKS.

In a way, I received exposure to what bank interest rate can do to one. Perhaps that the reason why i can constraint my spending habits much lesser than most of my peers.

Delayed gratifications. Now that's something not easy for the Y generation.

Work hard, save hard, invest wisely. Sounds easy.. But in reality, most pol couldn't differentiate needs and wants most of time.

Cheers.

Your post resonates with me as I have a young child who is barely 2 years old.

Yes, as what some forumers have mentioned within this thread, the expenses incurred are not just monetary but also in terms of time and effort as well, as one must really devote a lot of personal time to caring for their child. There is simply no substitute for being physically there to interact with your child, play with him/her and share his/her joy and laughter. It's really a kind of joy which is hard to describe until you experience it, which is why parenthood is such a pleasure for some, and a pain for others (loss of freedom).

I actually spoke to a financial planner who told me I probably need about S$300,000 by the time my daughter is ready for University at the age of 18. Since I don't really believe in the returns provided by an endowment plan, what I did buy for her was a life insurance policy which will cover her till she is 18 and then the premiums will stop. In the meantime, I will be saving up for her education through investing my own funds and using my own savings, since I know CPF is almost untouchable.

And yes, on the topic of spending habits, I think as a parent we must really learn to inhibit our spending urges and instead learn to save more money for a rainy day and for our child(ren). Delayed gratification is somewhat a dirty phrase which is not recognized by the current generation anymore, seeing how many teenagers dine in restaurants, own iPhones and Blackberrys and talk about material goods and consumerism even before they start earning their own keep. It's correct to say that Generation Y is even less frugal (in general) than Generation X, and Generation Z will probably be even more pampered by the "paper" wealth which has been accumulated by their parents.

I think it's not always the problem of not being able to differentiate needs from wants. I have spoken to friends and the problem lies in not being able to control the urge to procure those wants, and giving themselves up to indulgence and a "live for the moment" attitude. In other words, self-control is sorely lacking in today's society and youth.

[Bibi]

I actually spoke to a financial planner who told me I probably need about S$300,000 by the time my daughter is ready for University at the age of 18. Since I don't really believe in the returns provided by an endowment plan, what I did buy for her was a life insurance policy which will cover her till she is 18 and then the premiums will stop.

Hi MW, the policy you bought for her is it a term insurance and coverage will stop when she is 18 years old? Actually endowment I thought return is pretty stable and 2.5% is usually achievable? It's more for diversification and for those who don't know much about investments.

[Musicwhiz]

Hi MW, the policy you bought for her is it a term insurance and coverage will stop when she is 18 years old? Actually endowment I thought return is pretty stable and 2.5% is usually achievable? It's more for diversification and for those who don't know much about investments.

Hi Bibi,

The policy I got is from NTUC Income and it's a Life policy, which means there is a surrender value and a guaranteed and non-guaranteed portion by the time my daughter hits 18. I also added a rider which makes the policy FOC (no more premiums) should something happen to me (touch wood!). Basically the policy can cover some of her University tuition fees if need be if she chooses to cash it in. If not she can let it compound and there will be good returns on it. It's more like an additional layer of protection as I will also be building up my buffer cash stash to put her through tertiary education.

As for 2.5%, yes this is achievable but very low over the long-term. If inflation is set to remain at 3-4% then your money is still being eroded. I'd like to think that I can average about 5-6% returns using my own money to invest over the long-term, and this is what I am striving to do.

[d.o.g.]

The policy I got is from NTUC Income and it's a Life policy, which means there is a surrender value and a guaranteed and non-guaranteed portion by the time my daughter hits 18. I also added a rider which makes the policy FOC (no more premiums) should something happen to me (touch wood!). Basically the policy can cover some of her University tuition fees if need be if she chooses to cash it in. If not she can let it compound and there will be good returns on it. It's more like an additional layer of protection as I will also be building up my buffer cash stash to put her through tertiary education.

IMHO the policy you bought was totally inappropriate.

1. Whose life to insure?

Your daughter has no earning power until she actually starts work. Until then she has zero economic value and buying insurance on HER life is a waste of money.

Loss of the child's life does not result in economic loss. Therefore you should NEVER buy life insurance on a child's life.

Instead, you should buy term insurance on YOUR life that will last until SHE is 18 (or 21). That way if you die there is money to see her through graduation. With the policy you bought, if she dies you get money, but then what is the point when she is not alive anymore?

2. Limited Payment

The policy you bought is in fact a limited-payment whole life policy. While it may appear attractive because you pay for a fixed number of years but get lifelong coverage, all the insurer did was to take the payments you would normally make over an entire lifetime, and spread them over a smaller number of years. In other words, after including the time value of money, there are no savings. Only the timing of cashflows was changed. And logically since present cashflows have more value than future cashflows, it is better to delay cashflows for as long as possible i.e. DON'T take limited-payment plans.

Consider what happens with 2 plans: Plan A requires payment for 10 years, while Plan B requires payment forever. Plan A costs more initially, but eventually Plan B costs more. If the insured lives forever, Plan A is cheaper. But if the insured dies within the first 10 years, Plan B is cheaper. Nobody knows how long a person will live, but since premiums are level throughout the person's life, with inflation the future premiums are actually very cheap. Therefore it makes sense to delay paying premiums for as long as possible i.e. take the pay-forever plan.

3. Surrender value

There is a surrender value because the bulk of the premiums you are paying are being invested by the insurer on your behalf. Only a very small portion of the premiums is actually paying for life insurance.

Suggestions:
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a. Buy term insurance on YOUR life

Since you are the breadwinner you can't afford to die. With term insurance your family will get the money you would have earned if you were alive.

b. Buy medical (health and surgical) insurance on HER life

This will ensure she gets coverage before she develops any medical conditions. Buy the most expensive insurance you can afford. It's cheap while she's young. If it gets too costly when she's old, she can always reduce coverage. If you skimp on medical insurance, and she gets ill, it is usually impossible to increase coverage.

c. Consider disability insurance on YOU

If you are injured and unable to work, or can only find lower-paying work, the disability insurance can make up some of the difference in income.

d. Invest wisely to accumulate money to pay for her education.

Do not expect any returns on the term insurance policy. If the term policy is claimed it means you died. Presumably you want to stay alive and watch her graduate, which means the term policy expires worthless.

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This is what is meant by "buy term and invest the rest". When you buy term instead of whole life insurance, there is a LOT of money left over for investment. Conversely, with the same amount of money you can get a LOT more coverage. I saw this myself when I terminated my whole life plan - with the same amount of premium, I could buy a disability income plan, a health and surgical plan PLUS a critical illness plan, AND there was money left over. Basically, my insurance coverage increased more than 20 times. Even Goh Chok Tong has seen the light and is now promoting term life insurance.

Singaporeans have very low life insurance coverage because most of the coverage is expensive whole life insurance. Unfortunately the insurance companies continue to push whole life products, to the detriment of consumers (and the benefit of the insurance agents). To his credit, Tan Kin Lian, ex-CEO of NTUC Income, is now speaking out against whole life insurance too.

As usual, YMMV.

[Musicwhiz]

Thanks d.o.g. for your post and thoughts.

While I believe you are right in saying that I should have purchased a policy on my life instead of hers, 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). Of course, this is really very far down the road.

For the record, I have already done the following:-

1) 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.

2) Purchased the most expensive (A-Class Ward) H&S Insurance for my daughter almost immediately after she was born. As you said it's very cheap while she's young and hospital bills can rack up quite a sum, which immediately covers the (small) amount you pay annually.

3) Saved and am investing my savings (hopefully) wisely! But it's an uphill task to accumulate a large enough portfolio for the passive income to really make a difference. Right now I am just aiming for 6% yield or about $1,000 a month passive income for FY 2011.

As for disabiility insurance, I had explored that before but decided not to take it up as it's not cheap and my wife is also gainfully employed, so unless (touch wood) both of us perish together then it's likely there will still be one income earner. However, that said, I do intend to explore this further in early 2011 when I next meet up with my financial planner.

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. You either pay more and get same coverage, or pay the same and get less coverage. That's the message I got from my financial planner.

[Bibi]

I am not sure whether purchasing life insurance for a child is necessary. My opinion is if one purchase say 50k for a child and 20 years later because of inflation say 3% this amount actually becomes only 27k in today's dollar. 27k can't provide much support to a family right? Note 27k is when the child is 20 years old. It gets lesser when the child is 30 years old. Unless you bought a 200k life policy which I think the premium will be very expensive.
Term life insurance serves it's purpose for protection only and that is why it is cheap. My opinion is insurance should only be meant for protection. And not together with investments. There are fixed premium term which cover a person till age 99 years old. These will be cheaper compared to keep on purchasing 10 year type of term till that person is 99 years old.
Decreasing term insurance can be useful imo. E.g. A parent will need 300k to support a newborn till he is 18 or 20 years old. As the child grows up, the parent don't need to cover themselves so much, hence I thought a decreasing term insurance fit this purpose.
I wanted to purchase a child critical illness term for my son but max coverage is only 50k. The amount is not significant and hence I decided to drop the idea.

Like what d.o.g have done, I also intend to terminate my 2 life policies. They will be terminated when the next recession comes and I have fully utilized all my investible cash. The surrendered value will all be ploughed into stable shares.

[d.o.g.]

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.

[flinger]

This is a great discussion thread! MW, can you make this a sticky or a resource or something. I thank everyone D.O.G. , MW , Arthur BIBI for sharing such clear thoughts. This is one reason why I love this forum.

When I came to the wallstraits forum, I was totally blur, but over the past two years, learned so much for the seniors like D.O.G etc...

Thank You.

[yeokiwi]

Just dump the life policies

It is quite trued that most Singapore families are under-insured.
Imagine a family of 4 with a monthly expense of $3000, the total sum of money required to last the family for the next 20 years is 20 x 12 x $3000 = $720k

The amount of money has not even factored in the yearly inflation.

The above sum does not even take care of the worst possible scenario of having a disabled breadwinner that requires medication. Instead of bringing in the dough, now the breadwinner is using more money to support his life. Therefore, it is crucial to have a disability insurance to take care of this possibility.

Not many people that I know of have a $1 million term insurance and adequate disability insurance even though most of them have kids and retired parents.

[Zelphon]

I am not sure whether purchasing life insurance for a child is necessary. My opinion is if one purchase say 50k for a child and 20 years later because of inflation say 3% this amount actually becomes only 27k in today's dollar. 27k can't provide much support to a family right? Note 27k is when the child is 20 years old. It gets lesser when the child is 30 years old. Unless you bought a 200k life policy which I think the premium will be very expensive.
Term life insurance serves it's purpose for protection only and that is why it is cheap. My opinion is insurance should only be meant for protection. And not together with investments. There are fixed premium term which cover a person till age 99 years old. These will be cheaper compared to keep on purchasing 10 year type of term till that person is 99 years old.
Decreasing term insurance can be useful imo. E.g. A parent will need 300k to support a newborn till he is 18 or 20 years old. As the child grows up, the parent don't need to cover themselves so much, hence I thought a decreasing term insurance fit this purpose.
I wanted to purchase a child critical illness term for my son but max coverage is only 50k. The amount is not significant and hence I decided to drop the idea.

Like what d.o.g have done, I also intend to terminate my 2 life policies. They will be terminated when the next recession comes and I have fully utilized all my investible cash. The surrendered value will all be ploughed into stable shares.

Hi Bibi,

Won't you take a massive loss if you choose to terminate your life policy?

I am currently paying for a full whole life policy with GE..
Flexilife 20.. My friends advise that once you take it up... May as well pay till maturity as premature termination results in hefty loss...

What do you think?