I'm going to provide some potential evidence for why 'Term Insurance' only attitudes are frankly, ridiculous.
Maybe its because the Seedly Finance Festival ended not too long ago, but I've been seeing a lot of feedback from a new wave of BTIR [Buy Term, Invest The Rest] advocates. BTIR does have its merits, even though that's absolutely no statistical evidence in the slightest that it has ever worked or would ever work because behavioral finance - and I would know, having written my own guide on it despite that.
But there's been an interesting argument from BTIR advocates for the longest time that Term was inherently superior to whole life in the majority of situations due to it's affordability. Coming from a Financial Advisory - which offers the majority of insurance companies in Singapore, we can take advantage of competition/inefficient pricing in products and render this particular theory moot.
...while adding insult to injury by using a stubborn Term Advocates Worst enemy - a Whole Life plan. Till 99.
Let's Bring On The Contestants!
Coming from a Financial Advisory that offers almost all the insurance companies in Singapore - the first thing I did was put together the most affordable Term + ECI insurance, and Whole Life till 99 that I could generate on my systems. Naturally, these two policies are from different companies. The profile is Male, Non Smoker, 29 years old [me!] and coverage is till 70 years old. Coverage is for $150,000 : Death/TPD/ECI. 70 years old is actually increasingly ideal - with a country looking at a retirement age of 67, an auto opt in for CPF at only 70 years old and with average lifespans in Singapore having increased by 15 years in the last 3 decades alone...
...it wouldn't really be that surprising for the average mortality in Singapore to be 90+ instead of 82 by the time I'm 60.
UPDATE: As of May 2021 when I updated this, the policy I'm featuring is only the second most affordable in Singapore. I do not sell the first one.
Age 30, $150,000 Death/TPD/ECI
$1238.25/yr (Term till 70) vs
$1322.25/yr (Whole Life till 99)
The premium Term here is the same, making it a fair comparison - just some confusion with the company [age next and age last birthday, which is why you see the 40 and 41 premium Term].
By Amping up the multiplier to some degree, not only is whole life competitive against the term plan - but it also provides additional claim values, a higher range of critical illnesses, surrender values and other perks.
But we can pretend that the policies have equivalent value [in terms of sum assured, coverage and perks].
Now, using my guide on Buy Term, Invest The Rest - we can draw some numbers with surprising results.
What Kind of Investment Numbers Do You Need to Invest The Rest Effectively?
When you subtract $1238.25 from $1322.25, you get a solid investable difference of $84. A year.
Looking at the whole life numbers above and running them through a handy-dandy Financial Calculator, you get the following BTIR Factors: or basically, what kind of IRR net of fees that you'd require in order to 'break even' on Buying Term, Investing the Rest.
BTIR ($16,261.55) : 6.63% [GUARANTEED]
BTIR ($20,721)(3.25%): 7.54%
BTIR ($37,790) (4.75%): 9.72%
This means that you need a minimum of 6.63% and a more likely annualized return of 9.72% in order for BTIR to be effective, let alone profitable! You have to INVEST AGGRESSIVELY at such an annualized return for almost 40 YEARS, without taking out a dollar.
I've already written an article how hard it is to achieve this realistically, but I think one picture recap would suffice.
READ ALSO: Why You Should Be Cautious of Investments Promising MUCH MORE Than 10% (especially without context)
Some Additional Problems for Hardcore Term Investors would be...
1) Although Behavioral Finance already dictates they probably wouldn't succeed at investing for 40 years in a row anyway [imagine investing in majority equities in your 60s], the return absolutely required is already higher than that of the 20 year return of the SNP500 from 1997 to 2017, or 2000 - 2019, not even including fees.
[6.63% > 6.06%] 2) The value of the Term policy is inherently lower (less coverage range, less features)
3) Investing at that Quantum ($84/yr) is extremely difficult without bundling or having some kind of transaction costs.
4) It is unrealistic to presume that there will be no bonuses accumulated in the 40 year period.
By combining this discovery with my skill set and position as an FA, there's a reasonable opportunity to lower costs of insurance with justifiable replacements - something that I'm currently still writing an article on. I recently optimized a prospect's plan to purchase two Term Insurances - till 58 and 75 with such a structure.
Some benefits include:
a) Lower cost per year: $160/yr b) Lower costs on insurance in total: $11,000+ c) Additional Surrender Value of $34,442 at Age 59 [like one big Ang Pao]
d) Higher coverage range of 39 CIs/benefits more
e) Higher coverage after Age 59 till 75 for Life Insurance ($250,000)
With the summary here, you can take a close look at how the numbers came about in the picture above. I have many, many variants on this, which also recently include family planning (insurance for young children and top ups for new parents).
Hopefully some of this showed how important it is to keep an open mind about insurance. While this is just a case study, it's possible to apply it, customize and optimize it across different sum insured's and ages and genders with a little work.
There have been many changes and upcoming changes - some people think that whole life plans (along with other par plan projections) will get significantly inferior (probably) and more expensive (probably not), but ultimately, a good FA will adapt and figure out how to strike a good balance for insurance to be affordable and practical.
As I get older and accumulate more experience - I've been seeing increasingly worse and worse insurance profiles brought about by an attempt to cut out professional advice. The fact that you're reading this portion shows that the market, and yourself - has moved towards people who have a strong vested interest in improving their financial situation. This includes lowering your costs, which is respectable. Sometimes, trying to lower your costs includes cutting out professional advice that could go the other way. ...No one said you couldn't get the best of both worlds. I'd love to see if I can help you out, if you'd have me.
Money Maverick Money Maverick is the alias of one Luke Ho, a licensed Financial Consultant since 2017. He is an Investment and Critical Illness Insurance Specialist.
Using expensive, high fee unit Trusts, he has outperformed the SNP500 every year from 2016. For the year 2020, Client performance was between 20% to 141% net of fees using strictly MAS-licensed investment instruments. Money Maverick was started in 2018 to address the many Financial Misconceptions put out by non-licensed Financial Bloggers giving ‘free’ and potentially detrimental advice. He would be happy to give you professional advice personally, or to speak to you as a writer of one of the Top 20 Investment Blogs in Singapore. [Top 20 Financial Blogs, Singapore: Withcontent.co [2019, 2020] CONTACT: 91769099 [whatsapp, telegram] FACEBOOK MESSAGE: https://www.facebook.com/luke.ho.54/ TRACK RECORD: https://www.moneymaverickofficial.com/about REVIEWS: https://www.facebook.com/themoneymaverickofficial/reviews/ If you have any such questions about the articles and how it may apply to your finances, you can feel free to drop Luke a message through any preferred medium (if you prefer privacy). Do like and share his page, https://www.facebook.com/themoneymaverickofficial, if you enjoyed the article. You can also share the articles with your loved ones in the links below.
The views on his blog are strictly of his own opinion and have no affiliation to any of the companies he works with. Here are some of Luke's resources on: 1) Investing: Why you should invest aggressively NOW (and how you still can have peace of mind) 2) Insurance: The Newest, Rising Critical Illnesses in Singapore (2019) 3) Retirement and Leverage: Leveraging a Private Annuity, Pros and Cons (ft. Jamus Lim) 4) Spending and Saving: The Biggest Spending Mistakes You DIDNT Even Know you were Making (and how to avoid them) 5) Job Assessment: A Case Study on How a $6k/mth GIrl makes MUCH more money than a $10k/mth Guy 6) Financial Optimization: How I Avoid the Largest 'Fees' of All