Keep the whole life or switch to term?

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:

1. 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). 
   
   
2. 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!
     
3. I’d save about 4% per year if I switch from monthly to annual payments for my whole life plan.
    
4. “Can I afford it?” is not the right question. “What do I truly need?” is the better question. 
   
   
5. 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!

 

Guess what I did?