Very early on in my career, i asked my trainer, whats the difference between a term and whole of life insurance?
This is by far the best answer i’ve gathered in my years of work
Term is like renting a house Whole of life is like buying a house
In this case, the house is the insurance. It provides the shelter against risks like critical illness, death and hospitalisation
When planning for insurance, we need to consider 2 major things
What risk are we insuring?
What duration are we insuring for? (Until age 50, 65 or 100)
So when i refer to term vs whole of life is strict speaking of point (2)
As for point 1, there isn’t a one size fit all plan, which is also why a person will have multiple plans in their insurance portfolio
Lately, i observed some of my newly onboarded clients coming to me with a bunch of whole of life insurance. Meaning, their insurance will insure them until the age of 100, so if a risk event happens at age 95, the plan will payout.
Some of their plans only payout upon death while some also payout upon critical illness
When I asked why did they choose this duration of coverage?
Some common responses are : “my insurance agent recommended” , “i’m not sure”
I can’t help but wonder if some financial advisors are making sound and suitable recommendation. It seems like they default to recommending insurance that cover to age of 100 as though whole of life insurance is the panacea to all financial problems.
This isn’t an issue if a person has unlimited budget. Using the earlier analogy, If you could own a house, why rent?
If i have unlimited budget, I might also design my entire portfolio with whole of life insurance
Maybe not.
So if you’re someone with unlimited budget, you can skip reading this.
My questions for people holding on to multiple whole of life insurance is : do we need all our coverage to be until age 100?
I’ve nothing against whole of life insurance, but a portfolio full of whole of life insurance may present a few problems, especially if one is in the wealth accumulation phase
Problem 1 : You’re paying for something that don’t fit
Is like wearing a branded jeans that’s oversized! We pay a lot but it just don’t fit us.
Instead, we could have gotten a cheaper alternative and use the money for something else.
To elaborate on this. One reason to get critical illness insurance is to insure the potential loss of income and to have an additional buffer for medical expenses
If you agree with this logic, are you still working at 80yo? If you aren’t, what’s the income to replace? Is there still the same level of risk? So why do we need all of our insurance to be whole of life?
Problem 2 : Drains cashflow
Budget allocated to risk management take away money that can be allocated to wealth accumulation. I’m a strong believer that we need to have enough and adequate insurance. But we don’t need insurance to be excessive and expensive.
Insurance can’t make us rich, maybe it can make our next of kin rich.
But my point is, if we are working with a limited resources, then shouldn’t we be more careful on our selection of tool? And If possible, try to minimise the expense?
Problem 3 : Under-insurance
The short term cost of whole of life insurance tend to be higher compared to term insurance
A common problem with whole of life insurance is inadequate coverage. Because so much cashflow has been allocated to whole of life insurance, a client could not take on more to ensure adequate coverage
In fact, they shouldn't! Because it is too heavy on their cashflow.
This begs the question, why isn’t some FA recommending the right instrument to help client meet their insurance needs?
No wonder there is huge insurance gap in Singapore.
Conclusion
I’m not bias toward whole of life insurance or term insurance. I believe both tools has its place. But the unthoughtful use of whole of life insurance irks me. And sometimes it puts client into a state where proper planning becomes difficult because of sunk cost and opportunity cost.
Matter of fact, most people rely on their financial advisor recommendation and they trust that their advisor do a good job
But i find some FA don’t seem to be acting in their client interest, let alone best interest.
At the very least, they could have suggested the options and let client decide
If you’re still reading this and your advisor only recommend whole of life insurance, you might want to think for yourself if their recommendation is actually suitable
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