2 years ago, I wrote this article.
Predictably, a butt hurt noob sent a complaint to my advisory firm at the time, and because most Compliance departments don't understand math (or insurance for that matter), I had to take it down for a while. Still, one of the valid points made (aside from a mistake where I had compared a female's numbers to a male's - though it actually made the whole life plan EVEN CHEAPER) was that the article was outdated for its time.
People reading it now may have the wrong idea if they're extremely desperate. And in such a high inflationary period where people are desperately trying to cut costs even by restructuring their insurance...
This is true, unfortunately.
I have kept the article up for memories, because I'm proud of the work that was done that benefited the client. Without my advice at the time, the client would have suffered serious financial detriment/opportunity cost of a large 5 figure sum over time.
But is this possible now?
SOME CHANGES SINCE 2021
The Financial Industry moves very quickly. RBC2 - otherwise known as the Risk-Based Capital 2 - was primarily motivated by unsustainably low interest rates.
I've written on the topic extensively, and you can read it below.
READ ALSO: All My Participating Policies Are DROPPING THEIR BONUSES: Why? [RBC2 and solutions]
The irony of interest rates being high now is not lost on me - do you think that plans will suddenly become projected to do higher again? Doubtful.
But I digress. At the end of the day, we've seen whole life and savings plans projections drop from 6.25% historically all the way down to 4.25%. And this is the higher end of projections that are illustrated - which obviously demolish consumer confidence.
During my time in the industry, I actively sold more and more Term Insurance as there are just too many uses for my aging clientele. Mathematical projections also often demonstrated that BTIR would beat a whole life plan more often than not.
A good advisor can help facilitate BTIR better than an individual alone, much like a coach is instrumental for a student's success - at least, that's what I have believed.
But it bothered me that my FA students have been encountering clients who took face-value advice insisting on Term Insurance - from online forums or even established professions such as lawyers, GIC employees or doctors without any analysis.
In the first place, none of these people are qualified, nor have likely ever been qualified to give advice - and we can work out why, since advisors should conduct professional analysis to provide the best possible needs-based solutions for clientele.
Statistically, there is also zero evidence till now that Buy Term, Invest the Rest even works. Obviously, we know that fulfilling the conditions would make it work, for example:
a) We know that the gross average rate of return on the SNP500 instrument is around 10%.
b) We know that Term Insurance is affordable and by denoting the duration correlated with your retirement planning, we can create a financially min-maxed Term duration that is affordable and maximizes benefits.
But as written before, execution has been statistically impossible for most human beings. It's partly why we respect some financial bloggers in the first place - for being exceptional.
READ ALSO: High Risk IS High Reward - Here's Why
One of my student's (FA) 31-year-old client was looking to buy a $200,000 ECI insurance coverage and was wildly insistent on Term from his friend's 'advice', which I thought was very foolish without at least considering Whole Life options. This 'advice' also suggested that investing the rest would have a much better outcome.
We will now conduct a brief analysis as to why this is the case.
ANALYSIS:
We first take one of the most competitive ECI plans in the market and get a quotation for the Term till 70. Let's go over some of the factors for this experiment:
Term till 70: is not personally my preferred choice - but its increasing IDEAL, like I said in the previous article - and that applies much more today than it did 2 years ago. But for people who don't intentions to retire early (or frankly haven't invested well or long enough to be able to do so), 70 is a good number for the following reasons:
a) Retirement 'Inflation': As prices increase, it'll be harder and harder for people to retire if wages stagnate, especially without investing.
To create sustainability, the retirement age in Singapore has been constantly raised by the government over time. An Age 70 retirement age may be more realistic for people who started working in their 20s.
b) Retirement 'Failure': Some people buy insurance up to the age which they anticipate retiring.
But there is a wide range of reasons people fail to retire - they could have gotten scammed, or forsaken their retirement for their children's future, and many other reasons. Age 70 is presently a good buffer for people who weren't able to retire by 65.
ECI Coverage: Should be up to date, with a minimum of 107 conditions or more.
Why 107? This is because the LIA Critical Illness list consists of 37 Critical Illnesses - but 2 of them are Angioplasty, which I've written about here - and Terminal Illness. Neither of the 2 have an early or intermediate stage, while the rest do. (e.g., Cancer, Kidney Failure, etc.) During the time of the 1st article, that was NOT the case: but in 2023 it's certainly so. It's actually fairly common to see over 140 conditions - although frankly it's questionable how likely you'll claim for the cost you are paying at this juncture.
Following these parameters, we also want to compare across the board for premium competitiveness. While not the cheapest, I've been assured price competitiveness (below market average premiums) in the Term and Whole Life categories, with the following results: Whole Life Plan: $2600/yr for 20 years [$40,000 x 5 till 70]
Term Plan: $1944/yr for 39 years [$200,000 ECI standalone].
Both have comparable coverage. A table summarizing the comparison is listed below:
To summarize the table and provide implications:
1) BTIR: Using two methods of BTIR, you need slightly under 6% and slightly under 8% respectively in order to make buying Term worthwhile.
This result is the foundation of the article and is discussed further below.
2) Total Premiums: It's not uncommon for the total cost of a Term Plan to be more than the total cost of a Whole Life plan, especially when Early Critical Illness coverage is involved and you're under the age of 40.
There was a trend briefly where Term till 99 was a thing, which probably made companies a lot of money off people who mindlessly BTIR without analysis as well. Similarly, it's not uncommon to find that total Term costs can be higher than total Whole Life costs, even though its generally accepted that a yearly Whole Life cost will be more expensive.
What % of Interest do I need to BTIR? There are 2 Methods that I teach my consultants to use to calculate this accurately.
Method 1: Add the premium difference to the whole life cash value @Age 70, work backwards for the interest:
If we just ADD the premium difference to the projected whole life cash value at Age 70, we'll get Premium Difference: $23,816 Whole Life Value: $46,338 If we invest the difference of $656 for 20 years and roll for 19 years at a 6% rate, we'll have about $77,000. Since the premiums I save and the value I can sell the whole life plan for is $23816+$46338 = $70,154 We can thus conclude that Buying Term, Invest the Rest is beneficial if we're confident of 6% annualized net of fees. Frankly, 5.7% will do already based on the numerical data.
But for a fairer comparison...
Method 2: Invest the $1944 for 19 years AFTER paying the whole life plan, then add the number to whole life cash value @Age 70
In a situation where you were genuinely competing - if you were the client in question and a peer was doing BTIR - why wouldn't you do the same and invest your spare monies after paying off your insurance? After all, the amount isn't a lot and you would both have used the same total capital - just that one of you chose whole life insurance and the other chose term. It wouldn't be fair to not maximize the use of the additional capital across the 19 year period, since BTIR 'maximizes' the use of the initial saved capital difference by investing it.
From this, if we tried to employ Method 1's 6% assumption but invested the $1944/yr for 19 years at that rate, we'll find that the person who purchased the whole life plan gets much more value for money:
$77,392.51 - Term (6%)
$69,567.19 (6%) + $46338 = $115,905 – Whole Life (6%)
At 7%, this isn't any better.
$104,061 (7%) - Term
$77,751.24 + $46338 = $114100 - Whole Life (7%)
It's only at the 8% level where we see that BTIR is a financially superior option than Whole Life, 'Invest the Rest'.
$139,921 (8%) - Term (8%)
$87,017.26 + $46338 = $133,400 - Whole Life (8%)
With a tenure like 39 years, 8% should be a statistically probable cake walk on the investment fund and instrument side.
But the real issue is that short of using something with penalties like an SRS investment or an ILP, it's statistically improbable for someone to invest 39 years in the SNP500 without being an exceptional investor.
Personally, back before RBC2, I already calculated this and used whole life insurance as a 'conservative' part of my portfolio to get 8-9% 'returns' without stressing out about BTIR as much.
Limitations of Study:
1) This is a case study provided to me by a consultant. While I was previewing this article, I was told that HSBC Term prices at the moment are ridiculous cheap now despite having ECI coverage and only being two years younger than the current case study.
I have also not checked on if the Whole Life Plan has a 'HSBC' counterpart which is much cheaper than the current example I'm using, outside of knowing its relatively competitive. I'm really only using this to point out that it can be done. 2) Investing capacity tends to differ wildly, but even for myself as an Investment Specialist who produced a 5-year return of over 30% annualized between 2017 and 2021, my rolling return based on month of entry varies wildly. On shorter periods, like 2022 alone, I can also experience large market underperformance. Clients who invested in 2021 have the hardest time.
So, while I have confidence in long term investment results of 12% or higher net of fees, I would say that 8% largely 'risk-free' is an incredibly good investment even with my capacity to produce 12% or higher. Still, I have had feedback in my career that 6 and 8% is very easy to produce because they read stupid articles about the SNP500 producing a 10% annualized return across the board.
I will only point out that the rolling returns across 10 and 20 years of investing for that index, before fees, taxes and forex issues - are -3% and 6.4% respectively, a far cry from 10%. For context, that's like investing $100,000 and expecting $295,370 in 10 years. You would also possibly get $186,560, which is about ____% less, or $73,740, which is a ____% lower than expectation and a loss of capital.
3) As mentioned, BTIR in itself is not a realistic concept without many good financial habits in place already, since there's no statistical evidence that the majority of FIRE Pundits can pull it off (Dalbar).
To be fair, purchasing your whole life insurance on the basis of following strategy 2 is perhaps, even MORE unlikely than someone BTIR-ing for 39 years - since you normally wouldn't remember that you're competing with 'yourself' and invest a specific, wonky number like $1944 after 20 years of not doing so.
Calculations are good but are not necessarily based in reality. Even a concept like investing $2100/yr for 40 years in the SNP500 to become a millionaire is not based in reality - in the 1980s, historical conditions were absurd such that fees, purchasing and selecting stocks to DIY an index, forex risk and other accessibility conditions would have made such a venture impossible...
...even though $2100/yr yielding an average historical rate of 10% would most certainly produce a non-inflation adjusted, gross of fee result of $1,022,000.
Conclusion:
Frankly, older whole life plans were much better than they are now.
CI coverage is generally better now, even with tougher definitions - but it costs more, and some of the conditions have such a non-existent probability of occurrence that it's ridiculous to assume that paying more for more CI conditions is a good deal without analysis.
It was TOO presumptive of not just financial consultants, but consumers as well - to assume that products will only get better over time.
I would generally encourage people to purchase their insurance earlier and hedge your commitment now, rather than try to wait for a better time in your life. If I should ever risk being a burden to my family by getting cancer - ESPECIALLY after the cancer changes to Integrated Shield Plans that have yearly limits compared to before - I'd rather buy it now even if its financially inconvenient.
I bought my insurance eons ago, as you can imagine, but I would still buy another whole life insurance at my age. Not just because the value for money can still be decent at 6% or higher, but frankly as you get older - time is money and you may not want to skimp on price now just to burn time in your twilight years for small money. I've also started considering my legacy, especially in lieu of my impending marriage and inevitably departing from my parents. Whole life plans are a lower cost for that that I'm grateful for.
If you're looking for effective investment solutions and to structure your insurance more effectively in supporting your family post-demise, you can always drop me a message.
My guided team would be more than happy to help.
Money Maverick