To switch or not to switch … (from a whole life to term insurance policy)
On the long list of my to-dos,
has been to review my life insurance coverage and policy. I’m a big fan of
personal finance gurus Dave Ramsey and Suze Orman. For the longest time I’ve
heard them rant about anything other than term insurance. And what do you know
– yours truly (i.e. moi) has a whole life insurance plan. Shhh ..
please, please, please - don’t tell Dave or Suze!
All this while my attitude
towards my whole life plan has been – I can afford the premium payments now. I
also believe that I can afford it post-retirement and till I die. If I can
afford it, what’s the problem, right? It doesn’t matter what Dave or Suze have
to say. Right?
Nevertheless, a voice in my back
of my head has been nagging at me to dissect this further. Perhaps it is the
introspection that has come with my current CFP journey. Perhaps it is because
I’m running out of things to optimise! Lo and behold, I finally got around to
it and was shocked at my findings.
OK, here are the facts.
My current whole life insurance plan & conundrum
I pay RM159/month for a non-participating
whole life plan that covers me till I’m 100. This covers life till 100 & TPD
(total permanent disability) till 60. Premium are to be paid till the policy
matures – when I’m 100 or when I pass away. At which point, my nominees get
RM150K.
The questions that have been
bugging me are: 1) Am I happy with the 150K coverage or do I want to change
this? 2) Should I change this whole life plan to a term insurance plan?
Conclusions after soul searching
After some detailed analysis and
soul searching, I answered 1) to my satisfaction. Conclusion here is that I’m
happy with the quantum of coverage. But I don’t need that much protection past
70, when I’d be debt-free. If the protection amount came down to RM50K post 70,
I’d be fine too. This means that there is some room for optimisation. Yay!
Happiness is .. when I can optimise. Now, onto #2.
In search of Mr Right (term insurance?)
I decided to get a quote online
for a term insurance plan … just to check it out. No harm looking, right? The
most fuss-free online quote that I could get was from fundsupermart. I got a
quote for RM937.50 per year for life coverage of RM150K for 30 years (till I’m
78 years of age). No TPD coverage though. The premium payable is not guaranteed.
Hmm … so it’s a comparison between a whole life (age 100) + TPD (age 60) coverage for cost of RM1,836/year or term life (no TPD) coverage for RM937.50/year (age 78). Both are sum assured of 150K. That would be a savings of RM898.50/year. Hmm hmmm .. should I do term and invest the rest?
Do term & invest the rest?
If I were to continue with the
whole life plan, I’d pay RM97,308 in total, ignoring the sunk cost. If I switch
to the term plan, I’d pay the insurer RM36,395 and would save (invest) the
remaining RM60,913.
Here I’ve assumed that the
premium for the term insurance increases by 10% at 55, 60, 65, 70, 75. It seems
like a reasonable worst-case scenario for me bearing in mind that this is well
below typical medical inflation rates, but hey, this isn’t medical insurance,
this is life insurance! I haven’t deciphered if my whole life premiums are
guaranteed.
In the table below I’ve outlined
the premiums I’d pay per year for the 2 different types of insurance, the savings
is the difference between the two premiums are in the blue column and then the
yellow & green columns are what would it look like if I invested the
difference for varying interest rates.
Scenarios 1 & 2 are me being
a complete klutz and consistently losing money year over year at -10% and -4%
respectively. Scenarios 3, 4 and 5 are where the investments generate 4%, 6%
and 8% respectively. Looking at my current PRS track record, I have 3 funds
that have a CAGR of 2.7%, 6.1% and 7.2% each. Given this, I feel that Scenario
4 is more realistic.
How does Mr Right (term insurance) compare to Mr Current
Here’s a summary of how to read
the above table ..
If I were to pass away at age 70,
nominees receive 150K with either policy, but there is a bonus of 6K to 49K
with the savings from the term policy. And so on for the different
scenarios.
My big aha moments
My learnings from this exercise:
- With my non-participating whole life policy, the
cash value in the policy isn’t something my nominees receive on top of the sum
assured of 150K; the insurer pockets the cash value.
The cash value is what I’d get if I surrender the policy prematurely or when the policy matures (when I’m 100 & around to receive this benefit). - If I want to use the cash value in the whole
life policy to pay for the whole life premiums for some months to keep the
policy alive, while waiting for a new (term) policy to be in effect, I’d have
to ‘borrow’ from the cash value in my whole life policy.
My insurer very generously quoted an automatic policy loan at 5% per annum. Effectively, I’d have to borrow money at 5% p.a. from my policy to use my cash value. #%#%*#!%!#! The agent will no doubt tell me that rather than surrender the policy, that I could use the cash value in the policy to stop payments and keep coverage, without mentioning that there is a cost to this.
This feels a lot like saving my money in the bank and then having the bank charge me an interest when I use my savings. I should own such banks! Not be their customers!
- I’d save about 4% per year if I switch from
monthly to annual payments for my whole life plan.
- “Can I afford it?” is not the right question.
“What do I truly need?” is the better question.
- I’ll have to do something about that wretched PRS fund that has a CAGR of 2.7%. This will be my next homework!
Validating assumptions
As an aside … A quick check on whether
my assumptions are reasonable .. In Aon’s 2021 Global Medical Trend Reports, it
turns out that Malaysia’s healthcare cost is one of the highest in the region.
Gross Medical inflation for Malaysia is 14% per year in 2021 vs annual general
inflation rate of 2.8% per year.
Yikes! I’m glad I sorted out my
medical insurance last year. But again, this is medical inflation, not life
insurance inflation … so let’s not scare ourselves unnecessarily. Note to self
– be on the lookout for life insurance inflation info!
