When buying insurance, many people only go for traditional whole life plans. I’ve come across clients who have as many as 4 such plans and still be under-covered!
In planning, I would normally recommend only 1 whole life and the rest of the protection is taken care of by term plans including Disability Income Plan and a comprehensive medical plan.
Traditional whole life plans appear attractive with the monies at maturity being more compared to the latter. But term plans are the best tools to boost one’s coverage. Here are reasons why term plans are ideal for increasing your cover without breaking the bank:
- Term plans cost much less than traditional whole life insurance. For a male (non-smoker) aged 35, a traditional whole life plan with S$100,000 sum assured (for death or total & permanent disability) will cost about S$2,186 p.a. whereas a whole life term plan (coverage till age 90) will cost only S$863 p.a. That is a difference of S$1,323!
- By restricting yourself to traditional whole life plans, you are likely to be inadequately covered due to budget constraint. By going the term way, there is a stronger likelihood of being fully covered.
- You can keep protection costs even lower as term plans allow you to limit the actual term coverage to an earlier age like 60. Most of us have much reduced protection needs by age 60 as our mortgage will be fully paid up and our dependents no longer need our financial support.
- You can also terminate term plans at any time when there is no longer a need for certain protection, without worrying about the potential loss of savings.
Besides reviewing insurance portfolios with multiple whole life plans, clients also tend to have multiple Investment Linked Plans (ILPs).
A guiding philosophy in my financial planning practice is to separate investments from insurance.
ILPs are infamous for having 'hidden' charges and fees that are not fully explained at the point of recommendation by the insurance agent. Some agents are not even aware of the list of charges and fees deducted via units from the account. Ask them about mortality charges (that eat into the investment returns), and they will draw a blank look. I'll explore the pros and cons of ILPs in another post.
When you invest in pure unit trusts on your own, instead of through an ILP insurance plan, you will generally achieve better returns over the long term. You can also:
When you invest in pure unit trusts on your own, instead of through an ILP insurance plan, you will generally achieve better returns over the long term. You can also:
- Have access to many more funds available in the market
- Create a proper asset allocation strategy based on your risk profile
- Stop and start investing at any time (to cope with events like retrenchment or unexpected high expenses)
- Change the amount to be invested (when income levels change)
- Change investment managers (when you feel your existing manager is not performing to your expectations)
Therefore, it is wiser to separate the two needs (in most cases) - protection and savings needs. We buy insurance to protect ourselves and our families. We invest to build our future funds and for our children's education.
