Insurance & Costs of having and raising a child

[yeokiwi]

Having life policies is just like having lousy stocks in your portfolio. Annually, the insurance company will send a letter to remind you to pay the premium and it will at the same time remind you of the mistakes in taking up the policies.
Instead of keeping the thorns that prick me annually or whenever I think about it, I chose to terminate all life policies about 7 years ago.

In total, I had terminated 3 life policies(one in money and two were not) and after doing that, I feel real good hehe....
My wife also terminated her policy too. Concurrently, we bought term insurance and disability insurance to cover ourselves.

I think this life policy discussion was made quite long ago in WS forum and it was a pity that all the great contributions were lost.

Actually, another great place to read through the insurance needs is the www.sgfunds.com. The forum covers many insurance topics and needs. There are similar debates too but after a while, the conclusion is still BTITR ( Buy Term, Invest The Rest).

[Musicwhiz]

Hi yeokiwi,

Thanks for the advice and for relating your own experiences. I guess I should have taken a harder look at my policies and also paid more attention to Wallstraits' old postings on insurance. Apparently, my attention was more focused on investment and brushing up on my philosophies instead of minding about insurance. On hindsight, that was a mistake as I could have saved myself thousands of $ in premiums.

I've brought forward my meeting with my financial planner and have decided to terminate the whole life policies in favour of term and disability, as I was thinking about it for the last hour or so. This could really save me more over the long-term and I can invest the difference for a 5% yield.

Sigh, sometimes I wish I could turn back the clock on some of the financial decisions made, then again it's never too late to learn and do the right things.

[hakfong]

hi all

this is my 1st post here. i'm just wondering if anyone here has taken a look at term insurance offered by safra? they look a lot cheaper than other schemes available. is there a catch?

[yeokiwi]

hi all

this is my 1st post here. i'm just wondering if anyone here has taken a look at term insurance offered by safra? they look a lot cheaper than other schemes available. is there a catch?

No catch except that it is a group insurance.
Being a group insurance, if the group(in this case, it will be SAF) decides to stop the insurance plan, your term insurance coverage will cease too.
Normally, it is not a big deal since most people can look for another term insurance elsewhere. But, for some who have ailments(heart problem, renal failure etc) , they may not be able to get term coverage from other insurers.

SAF uses the term insurance extensively to protect her 50k in service staffs and going by common logic, it is quite unlikely that they will scrap the term insurance.

But, if you are worried about that, you may have to look for personal guaranteed renewable term insurance that will not be affected by any organisation decision.

Actually, I heard NTUC Income term insurance is cheaper in the long run but I am not really sure about that.

[hyom]

This is an entertaining video from Suze Orman on her opinion of life insurance and "friends" who sell life insurance.

http://www.youtube.com/watch?v=6vnN9liFWaE

[Jacmar]

Thanks d.o.g., no offense taken.

I am reviewing my policies now (I have a summarized sheet) and realized that I had purchased quite a few whole life policies (some when I was young, and some in early 2000s), so I guess I made some bad mistakes there. I'd probably liquidate most of them and buy additional term to cover myself; then invest the money saved. Good idea when I started to think about it - I should have done this long ago haha.

As for my daughter's policy, it would seem that I should terminate the Whole Life policy to save myself money moving forward in 2011, and use the money saved to further increase my term coverage (for me and wife). Will have to speak to my planner about this. I guess although I already spent some $$ on my daughter's whole life policy, it's better to terminate now rather than suffer more years of paying when the returns are poor, and I can use term instead.

Once again, thanks!

Before you decide to terminate all your polices I would advise that you go to TKL website and look at 1 write up that tells you whether it is better to terminate your existing polices or not. According to him if the returns is still OK(>>3%) then it is still better to keep it. There is a formula to calculate it and it needs the insurance company projection of returns for the next few years.

[d.o.g.]

How about child critical illness or TPD coverage? Do you see that as important? Health plan usually allows post-hospitalization claim till 90 days. So for illness that drag few years or worst for life, it can be a drain to the parents financially.

Critical illness by definition is something that is going to kill you pretty quick. The bulk of the expenses will be hospital bills, which is why you buy hospitalization & surgical insurance. Buy the most coverage you can afford. It's cheap when the insured person is young. It may make sense to purchase a small critical illness TERM plan to pay for out-of-pocket expenses like a wheelchair or a maid. Again, the premiums are cheap when the insured is young. Out-of-pocket expenses can usually be self-insured.

For TPD, the illness/accident that caused it will normally land the person in hospital, where the bills should be covered by insurance. Eventually, if the person's condition stabilizes, then long-term care may be needed. Adults may be covered by disability income plans, up to age 65. Minors who do not have earning power cannot have disability income coverage.

Usually a critical illness plan will also pay out on death or TPD so you may not need separate TPD cover. If desired, again a TERM life plan will cover death and TPD. Again premiums are cheap when the insured is young. If such a policy is bought, it should be timed to expire once the person starts work, and be replaced by a disability income policy.

Remember that with term life plans, the policy expiry date has nothing to do with the insured person, and everything to do with the liability to be covered.

If you are 25 and you want to provide for your newborn child until he/she is 25, buy a 25-year policy. It will expire when you are 50 (and your child is 25). Likewise if you are 45 and your child is 10, buy a 15-year policy. It expires when you are 60 and the child is 25. In neither case should you buy a plan that expires when you are 65, because the determining factor is when the liability expires (i.e. the child is 25), not your age.

Notice that you DO NOT need a term plan that covers you until age 99. You only need such a plan if the child will be 25 when you are 99 i.e. you are 74 and your child is newborn, or you are 85 and your child is 11 etc. You can see how rare such a situation would be. People who promote term plans that provide coverage to age 99 have no clue about how to use insurance properly.

[SLC81]

As dog mentioned "$170K is on low side of estimation", My kid turned 5 this year and i already knew what does it mean. Whether it will turn out to be an "Investment" or "Liability" there is for sure quite lot of expenses and commitment at first.
Everything changes, our lifestyle, the social circle and so on.. Money is just one of the long list of things to worry about and there are things money can't buy (unless you have lot and lot of money lol). It is important that we plan early whether it is insurance, investment or education so it will save you lot of effort and money.. for instance, our biggest headache now to get into a good school for our kid 2 year from now and if we would have planned to have a kid we could have bought a property within close to 1 km good primary school

[Jacmar]

Before you decide to terminate all your polices I would advise that you go to TKL website and look at 1 write up that tells you whether it is better to terminate your existing polices or not. According to him if the returns is still OK(>>3%) then it is still better to keep it. There is a formula to calculate it and it needs the insurance company projection of returns for the next few years.

[/quote]

here is the relevant part of the article courtesy of TKL:

7 July 2010
Existing Life Insurance Policies
1. I have paid the premiums under my life insurance policy for
more than 10 years. The cash value is still less than the total
premiums paid. Why does the policy give such a poor yield?

The insurance company has incurred the following expenses:
- Distribution cost, i.e. agent commission marketing expenses
- Cost of insurance cover
- Profit margin
The distribution cost is the largest component and can take up to 24 months of premium. This
money has been spent and is taken away from your savings. The cost of insurance cover is
relatively small.
After deducting the charges, the balance of the premium that is invested is quite small in the
initial years. It will usually take more than ten years for the policy to reach the break-even point,
i.e. the cash value is more than the premiums paid.

2. I have an existing life insurance policy which gives a poor
yield. Is it advisable to terminate the policy?

You have already suffered a loss as the high expenses are already deducted from your current
cash value. To decide if you should continue the policy as an investment, you should consider
the increase in cash value over the next (say) 5 years, compared to the additional premium that
you have to pay. If the yield over the next 5 years is higher than 3% over the next 5 years, it may
be better to continue to the policy.
However, if the yield over the next five years is lower than 3%, it may be better to buy a Term
Insurance policy and terminate the existing policy. You can invest the difference in premium in a
low cost investment fund.
I have chosen 5 years for the period of comparison, as a rule of thumb. It is not too long and not
too short. I have also chosen 3% as the target yield, considering the yield that can be earned on
other investments in the market.

3. How do I calculate the yield over the next 5 years?

You should ask the insurance company to give you the following information:
- Current cash value of the policy (say $X)
- Total premiums payable for the next 5 years (say $Y)
- Cash value in 5 years time (say $Z)
You can compute the target value (say $A) = $X * 1.1592 + $Y * 1.0767
If the cash value in 5 years time (i.e. $Z) is more than the target value (i.e. $A), then the policy is
able to give you a yield of more than 3% over the next 5 years. You can keep the policy. If $Z is
lower than $A, the yield is less than 3%.
Here is an example
Cash value now $X $10,000
Total premium for next 5 year $Y $10,000
Cash value in 5 years time $Z $21,800
Target value (computed from formula) $A $22,.360
In this cash, the cash value is less than the target value, so the yield i.e. less than 3% p.a. for the
next 5 years.
The factors to be applied to get other target values (based on other future yields) are:
Yield Factor
for $X
Factor
for $Y
2% 1.1041 1.0508
3% 1.1593 1.0767
4% 1.2167 1.1030
5% 1.2763 1.2397

4. My insurance agent has advised me to buy a new policy to
provide additional coverage, as my earnings have increased in
recent years. Should I take this advice?

You should study the benefit illustration for the new policy to see if it offers you an attractive
return. You should study the distribution cost and effect of deduction. This is explained in a
separate article on Benefit Illustration.
If you find that the yield on the new policy to be too low, you should consider buying term
insurance for the additional coverage and investing your additional savings in a low cost
investment fund.

5. Should I continue with my investment-linked policy? Does it
give good value?
You should study the projected cash value over the next five years using the same approach as
applied to an ordinary life policy. In projecting the cash value, you should use an investment
yield of 5% (representing a modest yield on the future earnings of the fund). You can see if the
cash value meets the 3% target that you have set.

6. My insurance agent has advised me to terminate any existing
policy and take up a new policy which offers better benefits and a
better yield. Should I take up this advice?
You should never give up an existing policy to take up a new policy, as you will be incurring the
upfront cost again. You will usually be worse off by taking this action. It is not to your
advantage.

7. I have retired from work. I find it a burden to continue paying
the premium under my policy for the rest of my life. What should I
do?
You have the following options for these policies:
- Continue to pay the premium using your past savings
- Stop paying premium, and enjoy a lower coverage under the paid-up policy
- Terminate the policy and receive its cash value
If you have sufficient savings, you can study the yield over the next five years, to decide if you
should continue the policy. If you can get a yield on the policy that is better than the yield on
other types of investments, it is better to continue the policy.
If you do not have adequate savings to pay the premium, you have convert to a paid-up policy or
terminate the policy for its cash value.

8. I have bought a term insurance policy to provide adequate
protection for my family, Should I continue my life policy as an
investment?
You should calculate the expected yield over the next 5 years, using the approach described
above. If the yield on the policy is more than 3% p.a. (or the yield that you can get from other
types of investments) you can keep the policy as an investment.
Tan Kin Lian

[Musicwhiz]

Hi Jacmar,

Thanks for the information. However, as mentioned, 3% is hardly sufficient to beat inflation; and I think I can probably get a decent 4-5% return if I chose to invest the money myself. Hence, I may still consider terminating my Whole Life policies.