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Whole life insurance, universal life insurance and investing.

Tuesday, September 9, 2014

"It is a horrific investment!"

This blog post is actually a reply to Kenneth Chua, who left very thoughtful comments regarding how whole life insurance has worked for him: here.

Since not many readers visit the comments section, I thought I should bring the comments section in as a blog post especially when I believe I have something important to talk to myself about:

Hi Kenneth,

Yes, times have changed and there are many more options available to us now in Singapore to help us plan for retirement.

When I am in my 60s, I could be amazed by how things might be different just like how my parents find how things are more complicated nowadays compared to the time when they were in their 20s. Life was simpler then.

Well, we are lucky that we have a paternalistic government who, most of the time, do the right things. We still have to try to grow our savings to ensure retirement adequacy on top of what the government is trying to do for us.

With Singapore's core inflation at about 3% per annum, the whole life policies which I have are only tracking inflation with returns of about 3% per annum. While it helps to know that my wealth is not shrinking, it is not growing either.

When the time comes to draw upon the policies (i.e. cashing out at 65 like you said), the sum of money would start shrinking rapidly, both in nominal and real terms due to its utilisation and a lack of growth.

A solution would be to buy an annuity then but, of course, the money would be locked up again. Although most people would not like to have their money locked up, this is a good hedge against longevity risk for people who are not investment savvy.

For me, however, the better solution is to ensure our wealth grows at a faster rate than inflation and the sooner we achieve this, the better. Apart from saving a good portion of our earned income from active employment, investing in income producing assets that will grow in value is my preferred method.

The nice thing about this is that when I reach 65, I wouldn't have to cash out. Hopefully, these assets would still be generating income for me and this would help fund my retirement till my final day in this world.

Thanks so much for sharing. Keep the comments coming.


I also replied to another reader on Universal Life Insurance recently. If you are interested in this, please read comments: here.

Related posts:
1. Inflation! What to do?
2. To retire by age 45, start with a plan.
3. The best insurance to have in life.
4. An annuity: A case study.
5. Matthew Seah explains Blue Chip Investment Plan.

"The amount that is going into insurance goes up every year and the amount that is going into investment goes down every year. This doesn't work. It is a way of investing money poorly."


Unknown said...

Hi AK,

I chanced upon your blog this year and is impressed by your insights into the various financial topics. (Errh on oats as lunch occasionally yes, but not everyday..its quite filling :)

What works in the past for traditional whole life and endowment policies are not achievable now in the low interest rate environment. Your policy and mine are of different series of the same product (Prime Life). Thus, surrender value differs by about 15K. Life coverage is high with corresponding low premiums in the past. It was a struggle especially in early years paying the premiums for multiple policies. Hence, at age 65, it will be nice to surrender one or two policies at highest surrender value. However, it will be good too to keep these policies for your descendants as a gift.(Properties are a more preferable choice obviously..hehe..).

Current whole life policies offered don't even meet the inflation rate. The worst advice received is to purchase ILPs in order to increase the returns with wrong objective of insurance coverage vs investment returns. Thus, I don't encourage anyone to purchase whole life policies nowsaday.

AK71 said...

Hi Kenneth,

Thanks for helping to provide more perspective on the matter. Appreciate it. :)

Yes, you are right about how we probably have different series of the same product from AIA. This will explain differences in the surrender values.

I spoke with my insurance agent from AXA and he persuaded me not to surrender my AIA policy. He said I might want to consider it as a more conservative part of my investment portfolio with insurance benefits thrown in. Add the fact that I have had the policy for 18 years now, I think I'd just keep it as long as it is not too much of a strain on my finances. Of course, this does not mean that I won't change my mind in future. ;p

I share your sentiments regarding current day whole life insurance policies offered as ILPs. I won't touch ILPs with a 5 feet pole.

AK71 said...

From my FB account:


Hi AK,

A friend recently suggested getting Universal Life Insurance policy, taking a loan to pay part of the premium & service the interest only of the loan. The benefits highlighted is akin to getting high value Term Insurance coverage but with added benefit of cash value growth (i.e. form of wealth accumulation). Would you have a conversation with yourself on the value/risk of Universal Life policy and the circumstance that it might be suited for?

Thank you in advance 🙂

I don't think Universal Life Insurance is well known in Singapore and to me, it is just a more flexible form of Whole Life Insurance.

"You have the liberty to reduce or increase your death benefit and also to pay your premiums at any time and in any amount (subject to certain limits) after your first premium payment has been made." INVESTOPEDIA

It is still more costly than term life insurance as it includes elements of savings and investment. So, if you believe in not mixing up insurance and investment, this is not going to fly. 😉

SMK said...

that kenneth chua comment in 2014 is a very perceptive and insider comment.
I made extensive and intensive studies on my own whole life policies so I know that was a very good important comment. and most people won't understand it.

universal life insurance as it is marketed in Singapore, in this environment, is poison.
and ak, his question is not what you think it is.

"I don't think Universal Life Insurance is well known in Singapore and to me, it is just a more flexible form of Whole Life Insurance. "

SMK said...

comments on when it appears ie. when kevin approved.


AK71 said...

Hi AK,
My insurance agent recommended me the above. The best case scenario yield is at most 3.9%. My first thought is that this yield is even lower than the CPF rate of 4%. I might as well contribute to my CPF instead and let compounding work its magic. Is my thought process correct, any another insights to this would be much appreciated

I won't mix insurance and investment.
If you are saving for retirement funding, then, nothing beats the CPF SA. :)

AK71 said...

Also read:
Regret parting with CPF-OA savings 9 years ago.

AK71 said...

How many 20 years and $29,000 do we have?

K said...

Hi AK,

I have an investment ILP with Prudential and have been paying for it for 18 years now. The surrender value for the policy is more than the premiums I have paid so far. The returns are a measly 2.5% PA to date (linked into it are the TPD and CI components). My question is should I still continue or terminate it? From a financial point of view, what should I do?


AK71 said...

Hi K,

If you are in the black, consider yourself lucky. ILPs are ticking time bombs. Sell or not? Read the following and decide for yourself.

"The main issue is ILPs are not suitable after age 55, as insurance costs increase exponentially. So if it was implemented thinking it covers life time for death, and critical illness, it is potentially a time bomb. If it's implemented for investment returns, you may be disappointed with the returns due to the high charges and fees.

"The insurance charges are to be deducted from units by selling them. Imagine you are paying $3,000, after paying 5% charges, the remaining $2,850 is invested into funds. But your insurance charges at age 70 is say $8,000. Then you have to sell $8,000 worth of units to pay for the charges. Provided you have enough units to deduct, you coverage continues, while the accumulated fund depletes. If it depletes to zero, your cover is terminated.

"Some agents say the returns will pay for the charges, but seriously, at the older age, you'll have to reduce the risk of the portfolio, settling for a lower return. So there is a high chance that it will start to deplete despite returns, due to the rising insurance charges. The effect will hit you after 55."

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