What you need to know about whole and term life insurance that even agents get wrong
Watch the video for the detailed analysis:
Key Take-away From Video:
1) Unfair comparison resulting in unfair outcomes
Most people, even agents and advisors, are not doing an Apple-to-Apple comparison when it comes to whole-life vs term-life analysis.
They often get it wrong in the areas of either:
1) Coverage behavior as they often do not match the coverage behavior of the term plan to the whole-life plan.
2) The return rate used for the calculations as they do not take into account the risks exposure of the investments and often assume a return rate of 8-12% which is not a fair comparison to the whole-life participating funds.
2) 6% is the magic number for term life to be "better"
Based on the quantitative analysis, what you would realize is that for a buy-term-invest-the-rest strategy to be "better", your investments will need to provide an annual return of more than 6%.
That being said, for you to achieve an annual return of 6% return, you will need to invest in a balanced investment portfolio of which, chances are is that it will expose you to higher levels of risks as compared to the whole-life participating funds.
3) Whole-life is still preferred to act as your foundation
Apart from just the quantitative factors, qualitatively speaking, I feel that whole-life plans are a better option to use as a foundation of your insurance portfolio as the coverage that you have is more flexible.
When you are working, the coverage that you receive will help you replace your income and when you retire, the coverage will act as an additional buffer to help you transit to a different life stage should you suffer from a disability and critical illness.
We often forget that our lifestyle will change significantly when we suffer from a disability or a critical illness. And as a result of that change, we may incur additional hidden costs such as the need to renovate your house or the need to change your diet.
Having this coverage during your retirement years will help you address all these potential hidden costs that we may not have taken into consideration in the first place.
In addition, the coverage can also be taken into consideration as an asset for your legacy planning which will be of interest to you in your later years.
Apart from the flexibility of the coverage, there are also additional features such as retrenchment benefits and non-forfeiture options which I haven’t even talk about when it comes to whole-life policies.
4) BTIR is riskier as your margin of error is lower
With regards to the use of a term plan as your foundation, I am not a huge fan of it and neither do I recommend it as
1. You have to take on higher risk and invest correctly for it to work
2. The margin of error that you will be working with is very low as you cannot f-up either your investment returns or your insurance planning as that would cause the whole strategy to fail.
3. You end up mixing insurance and investment instead of separating it as your whole strategy is dependent on your investment performance.
This will put unnecessary pressure on you which will affect the quality of your investment decision and that is something you do not want to have.
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Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner that provides:
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This article is meant to be the opinion of the author
This article is for information purposes only
This article should not be seen as financial advice
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