Insurance & Costs of having and raising a child

[maniac]

Hi, my opinion is that -buy a term policy and invest the difference - may not be suitable for all people.

That is true. For a small minority of people a "buy term and invest the difference" approach may not be suitable. However a whole life plan is clearly unsuitable for most people given the higher costs and lower expected returns.

Clearly, buy term and invest the difference is more cost efficient, but you are assuming most people are investment savvy to invest regularly or/and DCA consistently for 20-30 years. If we can't do that, e.g. stop DCA or sell of when market is down, or buy/DCA when market is up, the returns wil be less reasonable. To have a right market pshchology and to maintain it for 20-30 years is not easy, or maybe it is just me.

a. Not all can invest regularly and consistently, or/and DCA through unit trusts/index funds, for 20-30 years through the many market cycles.

This merely requires the same discipline as that needed to keep paying the whole life premium. Nobody is asking you to pay more. You are paying exactly the same amount of money out of pocket. The difference is that instead of paying only one party (the insurer) you are paying 2 parties, the insurer and yourself.

It is less psychological straining when paying regular premium than DCA an index fund through the 20-30 years market cycles. I will have more discipline to go through insurance premium payment than DCA investment approach. Maybe it is just me again. Beside this, bonus declared is vested (shifted to safer assets) and is less affected by a market downturn, i.e. they do the smoothing for you.

b. After investing for many years and when you need to cash out and it is year 2008, your returns will not be good compared to an endownment or life plan.

Do you have statistics to back up this assertion? If you invested for "many" years and did not do well, what makes you think the endowment or life plan would do better, given that the endowment or whole life plan was invested in essentially the same assets, but had higher expenses?

I don't have real-life examples. But for example, a person bought a child education policy for 20 years in 1989. In 2008, when the policy matures, he gets a yield of 5.9%. If he puts the money in STI ETF in 1989(@1038), his return should be about 2.7% if he cashes out in 2008(@1761).

I already covered the differences in expenses previously, but basically with whole life or endowment you lose a big chunk upfront because of the commission. With term you only pay commission on the much smaller insurance premium. Then, every year the whole life/endowment policy costs at least 1.5% more to operate. Over time this 1.5% advantage (per year) translates to a big difference in realized returns.

A realistic long-term return for the overall stock market might be 5-6% annually. Let's say 5.5%. Index funds or ETFs would cost at most 0.5% per year, so the investor could expect 5% annually. On the other hand the whole life and endowment plans cost at least 2% per year to run, so the policyholder can only expect about 3.5% per year. Over 20 or 30 years this is a huge difference.

$1,000 invested annually at 5% per year becomes $33,066 after 20 years.
$1,000 invested annually at 3.5% per year becomes $28,280 after 20 years.

The difference is 17% in favour of buy term/invest the rest, assuming a 1.5% per year difference. The actual difference is larger because with the whole life and endowment plans you don't even have the full $1,000 working for you from day one - you lose almost all of the first year's premium to commissions. That's why when you terminate in the early years you get nothing back - because everything went to commissions and expenses!

This is also not taking into account the extra flexibility afforded the buy term/invest the rest investor, who can temporarily reduce his investment if he encounters a personal financial crisis, or increase his investment as his investible funds and/or risk appetite increase.

In contrast, a whole life or endowment plan cannot be reduced. The policyholder can only borrow money against the plan (and pay interest). If he converts the plan to paid-up status or terminates it, he cannot reinstate it later. And of course he cannot increase his "investment" later on except by buying another policy.

Whole life or endowment plans only make sense for 2 groups of people:

1. Insurance agents who earn commissions from SELLING such plans; and
2. Policyholders who want to have LESS wealth and LESS flexibility

There are plenty of insurance agents out there who will encourage you to buy whole life and endowment plans. But I presume we are talking about policyholders, group #2. I am not sure how many such people exist, but it takes all kinds to make up this world, so yes, I suppose there is somebody out there who deliberately wants to be financially worse off.


As usual, YMMV.

What you said is true.

Blackjack - no problem. d.o.g. is one of the most knowledgeable person in the forum and I learn from his posts.... I am also not an insurance agent or working in the financial industry

[jeremyow]

If one is in for only capital gains returns be it from stock market investments or insurance returns, there is only this much we can compare in terms of their compounded annual rate of return over a long period of time. The one that offers a higher annual rate of returns over the same period of time seems to be the winner, in some cases prudent stocks investment triumph over whole life policy.

However, if one looks not only at the capital gains comparison, but also in terms of building cashflow generation, building up a portfolio of stocks which offers sustainable cashflow generation in terms of dividends over a long period of time may prove lucrative. One not only has a sizeable amount of assets in a portfolio of stocks carefully built up over a long period, one also can derive sustainable cashflows from dividends received continually.

So, one can decide for himself. Have a whole life policy to see the certainty of the policy mature at the end of the policy period and being terminated and get back the cash amount? Or have a portfolio of carefully invested stocks that have no maturity date (termination is entirely up to stock investor to decide when to sell out) and continues to derive cashflows from it perpertually for whole lifetime and beyond? The same portfolio of stocks can also offer liquidity in case the investor needs to sell out and use some money if needed for medical care or other uses at old age.

One should decide for himself what to do since investing and insurance are important things that one should consider carefully. I am just offering another perspective to see things. No right and wrong. The best answer is to keep learning about investing and insurance, and grow one's financial education to make better decisions each time.

[yeokiwi]

I don't have real-life examples. But for example, a person bought a child education policy for 20 years in 1989. In 2008, when the policy matures, he gets a yield of 5.9%. If he puts the money in STI ETF in 1989(@1038), his return should be about 2.7% if he cashes out in 2008(@1761).

Well, this example is a bit too extreme isn't it?
One year before and after 2008, the difference in the index is as huge as 1000 pts easily.
And.. you had not factored in the dividend payment from STI-ETF.
The reinvestment of the dividend over 20 years is significant.

With the dividend payment(around 2.5% yield), even in the 2008 case, the return will easily rise to 5% and above.

[d.o.g.]

Beside this, bonus declared is vested (shifted to safer assets) and is less affected by a market downturn, i.e. they do the smoothing for you.

A "bonus" is simply an increase in the coverage and cash values of the policy. There is no "shifting" whatsoever. All that happens is that the insurer voluntarily increases its own liability to the policyholder i.e. upon claim or termination it has to pay the policyholder more.

The policy coverage and cash values have never been affected by a market downturn. The insurer always takes the risk that a market downturn will drag its assets below the value needed to pay policyholders. This is true regardless of whether a bonus is declared or not.

[kazukirai]

I don't have real-life examples. But for example, a person bought a child education policy for 20 years in 1989. In 2008, when the policy matures, he gets a yield of 5.9%. If he puts the money in STI ETF in 1989(@1038), his return should be about 2.7% if he cashes out in 2008(@1761).

Well, this example is a bit too extreme isn't it?
One year before and after 2008, the difference in the index is as huge as 1000 pts easily.
And.. you had not factored in the dividend payment from STI-ETF.
The reinvestment of the dividend over 20 years is significant.

With the dividend payment(around 2.5% yield), even in the 2008 case, the return will easily rise to 5% and above.

Yeo-san, you beat me to this.

Rightly pointed out. The choice of dates is a bit too selective. Even if you say you want to factor in the worse-possible case scenario, then we must be realistic and count for dividends no?

Anyway, some numbers to put things in perspective, if the dates chosen were from 30 Dec 1988 to 31 Dec 2007. You would have seen the STI go from 1038 to 3487 giving you a CAGR of 6.25% p.a without dividends.

So it's not very meaningful to use extreme cases as examples.

[jason]

Clearly, buy term and invest the difference is more cost efficient, but you are assuming most people are investment savvy to invest regularly or/and DCA consistently for 20-30 years. If we can't do that, e.g. stop DCA or sell of when market is down, or buy/DCA when market is up, the returns wil be less reasonable. To have a right market pshchology and to maintain it for 20-30 years is not easy, or maybe it is just me.

It is less psychological straining when paying regular premium than DCA an index fund through the 20-30 years market cycles. I will have more discipline to go through insurance premium payment than DCA investment approach. Maybe it is just me again. Beside this, bonus declared is vested (shifted to safer assets) and is less affected by a market downturn, i.e. they do the smoothing for you.

Just wanted to voice my thoughts on this. In terms of psychology of maintaining the payments (to insurance premiums) on one hand, and investments on the other hand, I will have to say the insurance co's does a great job. It gives you a great "pain" if you are to terminate before maturity, and dangles a "carrot" for you to aim for on maturity. For that, they "earn" a portion of your returns.

Psychologically, I believe it is more straining to pay the regular premium for 20-30 years, with no flexibility, no guarantee that the company is still standing, no say in what it invests, and regularly getting new agents that you have never met being assigned to you. You think it is less straining now because the market is bullish. But when the market is tanking, you will be so stressed that you have no control except to terminate before maturity. It will be very stressful when retrenched and be unable to service the premiums.

It is just a matter of self-discipline and knowing what is more important to you, restricted by limited time and resources. I like to add that to do investments yourself, you have to learn how to invest. You are responsible for your own actions. You have only yourself to blame if things don't turn out well. The investment skill that you pick up is not only going to benefit you financially, it is also a skill that you can teach to your children. It is a skill that you can apply and use throughout the rest of your life. It is something that cannot be taken away from you, ever.

I believe that as long as you are aware of the different financial products available to you, and that you keep an open mind about learning to do investments (if you don't already know), you will be your own best financial advisor.

PS: some pple really don't care if they have less wealth and less flexibility. They may very well value their time more than money. To each his/her own. But please be aware that savvy investments may not take much time as well.

[maniac]

thank you all for your comments.

[flinger]

Hi,

Thank you for all the great contributions from everyone, learned a lot on what is priority etc...

I've got question in regards to the H & S plans - Medishield plus from GE and the rest of the providers.

The question is : These plans cover you when you are in the hospital and when you need surgery, and they cover you as a private patient not as a subsidized patient.

Lets says after you leave the hospital, you need follow up for the next few months or couple years, when you go for these follow ups , you are still charged as a private patient correct?

For these follow up's , do these shield plans cover the payment? or do you have to pay?

The reason why I am asking is, as a private patient, the cost of follow ups can be very high .

A reason referral by my company panel to a hospital as a private patient, costs me like 600 bucks, and a few follow ups and the bill really goes up.

Can anyone enlighten me on this? D.O.G any ideas on this?

Thank you.

[d.o.g.]

Can anyone enlighten me on this? D.O.G any ideas on this?

I am not qualified to speak on insurance claims. It would be wise to contact the insurer directly. Also, talk to the agent who sold you the policy.

[flinger]

Can anyone enlighten me on this? D.O.G any ideas on this?

I am not qualified to speak on insurance claims. It would be wise to contact the insurer directly. Also, talk to the agent who sold you the policy.

Hi D.O.G. ,

Thank you for the reply. I was asking when you or others bought the policy, did you take in consideration if the policy covers follow up in the hospital after you leave the hospital.

I am asking more about the coverage of these health policies or you have to pay for it yourself since you are no longer in hospital.

If you have to pay by yourself then its going to be pretty ex as a private patient.