Going in-depth on ILP vs term

Jes , 20 Comments

Regarding my previous post going in depth on why I changed from Investment Linked Policies (ILP) to term, I think there are many people who have questions and so to make it clear, here are the main reasons again:
1) My coverage increased from 250k to 1 million
2) Yet my premiums decreased half from $266 to  $139
3) Furthermore, the $266 for ILP will only increase with age while the $153 for term policy is fixed for the 25 years.



Why ILP and life insurance are so popular
Invest a sum for every month and when you retire, you get a lump sum for enjoyment or for your children's education. Invest so that your money can grow and not rot in the bank. Invest for your children's future. Sounds familiar?

This is preying on your insecurities where you think you might not have enough savings in the future and you are tucking away a hidden sum. This is preying on your greed where you think you are investing and getting more.

They always paint a beautiful future picture which makes you lose focus of the amount you are giving them versus the amount you are taking back. 

My fellow friends mentioned that Whole life insurance is not so bad because you are still getting back your principal sum of money while retaining coverage for the rest of your life. That's like a savings portion tucked away while for ILP, it is more like an investment. Do not confuse these 2 policies/concepts!

How much commission does your FC earns
To give you the full picture on why your Financial Consultant (FC) promotes certain policies, we need to take a look at their commission structure.  Money is a good motivator which is why they may not care about what is really beneficial for you. Take a look at the table below from One Million Diary:

The percentage might vary from company and throughout the years but the concept is the same. Now I know why all FC always encourage you to switch to them. They can earn from your accident plans!

Term has about the same commission as the rest!
Yes that's right. Think carefully though. You pay lower premiums for term so consequently, your financial advisor will earn lesser. Are they going to be thankful you save some money? No way. They are sales people who wants you to pay more so they can earn more.

What I am saving ILP vs term
In a month, I would save $266 - $139 = $127
For 25 years, I would save $127 x 12 months x 25 years = $38,100 and this is guaranteed. If I put it in my OCBC 360 account and get my expected 2.25%, I can get $51,175.55 just for that $127 monthly saved for 25 years!

ILP has no guarantee on the amount of money you can get back in the future. Furthermore, you will have to top up your premiums in the future. Adding in inflation of 2 to 3% during the locked in period, you will be able to determine which policy is better.

How to tell your insurance agent you intend to terminate
I think many Singaporeans are very kind, they do not want to be too harsh on their FC, which is why I got asked this question a lot. First, ask about your ILP funds returns. Second, ask about term plans. If you really want to terminate, just tell them you would prefer to lower the premiums due to financial woes. If they keep on dragging and delaying, just tell them you are going to change an FC, that should scare them.

Of course if you have to reach this point, I would advise you to really change an advisor. Alternatively, just call straight to the insurance company and cancel.

Who is ILP suitable for
If you are keen to make an investment through funds, these are for you. If you can tell me what kind of funds your policies go into, you are fine. If you know exactly how much returns you are projected to get and went in with open eyes, go ahead. These are investment tools and not just insurance policies. They are not for everyone.

The best policy is the one that saves money and yet have higher coverage. Don't confuse insurance with investment, please!

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Jes

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20 comments:

  1. I have a wholesale life policy that my parents passed to me i.e. a legacy product that I have taken over the premium payments of. It has a surrender value and the premiums are less than ILP but more than term. Honestly, it would be better to just stick to term. The returns promised to my parents years ago by the insurance agent did not materialise and we can't hold the firm to it. Oh well, that's how we learn.

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    Replies
    1. Hi Finance Smith,

      Precisely! It seems I can never find someone who has got the returns they promised, always lower. Just a quick survey among my friends I know more than half do not know what they are buying, even though they are graduates. That is very bad and troubling for me. Hopefully with you and other bloggers' effort we can reach out to more people :)

      Delete
  2. I went to Insurance office to terminate ILP myself. ;-)

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    Replies
    1. Hi Uncle CW8888,

      Wah so old school! Hahaha, really no use for your FC. Well, we all make mistakes, luckily we learn fast :)

      Delete
  3. Jes,

    Wholelife not so bad. Its equivalent to doing voluntary CPF top-ups. Its a good hedge against the majority who will lose money doing DIY "investing".

    I had 70% term and 30% wholelife.

    I cancelled my wholelife policy after 20 years when my investing track record reassured me that "buy term and invest the rest" is not based on a slogan ;)

    I cancelled my term policy much earlier when my networth exceeded the policy payout. The term policy has outlived its usefulness.

    I'm now naked as in Life insurance free :)


    But ILP is plain horrible. They are only sold to "bei kambings". Once bei kambings become financially literate, everyone of them cancel like no tomorrow!

    ReplyDelete
    Replies
    1. Hi Jared,

      Good to know that Wholelife is used to hedged against people like me! Though DIY investing is really not for everyone, I agree with you. I am still gonna stick with Poems sharebuilder and Term, separating invest and insurance. Maybe for people who don't like to invest, wholelife sounds suitable for them.

      Many of us have to start from being financially illiterate so ILP is still selling like hot cakes. I saw my insurance friend boasting about his client's premiums hitting $1.5k a month I was like feeling so sad for his client.

      Come, tell me your net worth wahahaha! You have already reached the goal that most of us are aspiring to. Don't need insurance at all! There should be a slogan, invest until no need insurance :D

      Delete
  4. Jes,

    If your net worth exceeds $1 million dollars, do you still need your term policy?
    (Coffee tea or me may have another opinion; new wife not cheap)

    Unless you have more children or your lifestyle has been upgraded to business class and you never want to go back to cattle class, then perhaps you need to move the goal posts and add more term to say $2 million?

    Other than that, people forget Life insurance is only needed when our current net worth is not enough to sustain our dependents ;)

    Life insurance can be savings (wholelife or endowments); they are never "investments".

    I'm one of those uncles next door ;)

    ReplyDelete
    Replies
    1. Hi Smol,

      You this uncle next door 卧虎藏龙. Cattle with business class abilities? Wife not cheap, so I found myself a wife who is richer than me!

      I had this assumption I will keep my term to its maturity, until your comments here. Looks like it is a good idea to remind ourselves to review all our policies on a yearly basis. Gonna be many years before reaching your status though >.<

      Delete
    2. Hi Uncle Jared,

      1 million is like so far away. You know the people at our age, got housing debt, car loan, family expenses... $100,000 is the aim first, ha!

      All good reminders and guidance! Now I thinking to downgrade to 500k maybe also enough. Life insurance as savings or passive savings is indeed a good idea. How about a post on that huh?

      Delete
  5. 1) Coftea,

    You can keep your term policy if you want your dependents to "profit" from you selling salted eggs ;)

    "How are you feeling?" has a different connotation when you are in your twilight years...


    I like your style! Having a sugar mommy can save 10 years of corporate struggle ;)

    Sucks! I'm too old to be a toy boy now :(



    2) Jes,

    Don't keep score all the time.

    Focus on doing the things you love, the money part will take care of themselves.

    If you do decide to become a business owner, it will be a severe pay-cut for the first few years.

    Saying no to this endeavour because it will put you further from your target of $100K goal will be the silliest excuse ever ;)

    But I know you won't. We are followers of our hearts.

    If not, you would have married a ready-made millionaire and not coftea.

    You can tell me. Was it his tight buns or wide shoulders?

    Don't tell me its his big...

    LOL!

    ReplyDelete
    Replies
    1. Hi Jared,

      Sometimes it seems like you can peek into what I am planning, that's super scary! I remember a wise friend also told me the same thing: Just keep doing what I like and the money will come, that's what happened to him.

      I am getting ready for the severe pay cut and long hours. I am primping myself for the adjustments that will come and yet I know I will not regret this. Why did you not venture into this if you are also like me?

      You think too highly of me, must find me a millionaire to woo me first. Well, I can say for sure it is his BIG organ that you can't see it on the outside but can feel it easily...






      His heart la! Tsk.

      Delete
  6. Hi Jes,

    I have commented on your previous post and i have a slight comment to share with your readers. It's related to Whole Life since you briefly mentioned, nothing to do with ILP.

    Agree with SMOL. Whole life is not so bad especially if you end up in a situation where your dependents have to care for you that adds on to their stresses (more thinking along TPD & CI).

    Term has a maturity and you may have several years beyond that maturity which you are still exposed to those risks.

    It is important that when you choose term over WL, you consciously plan to take care of this risk yourself whether through savings or investing. And like SMOL, if you can cover that risk more than sufficiently, then go on and cut the WL (probably with some gains in the surrender value by then) and then even further, cut the term.

    -wj

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    Replies
    1. Hi Wj,

      I agree with you since you know clearly the purpose of having a insurance and the difference between whole life and ILP. Some of my friends buy whole life thinking it is an investment and ILP thinking it is a savings account. That's weird.

      Thanks for highlighting the part where term has a maturity and one may have to take on the risk after which. I agree with you and hope my dependents are financially capable or I will be like SMOL by then. I prefer to go term + STI ETF, but definitely not everyone should 'buy term, invest the rest'.

      Delete
    2. Hi Wj,

      Anyway, good pointers, have edited the part about whole life vs ILP :)

      Delete
  7. Jes,

    Already did.

    I am running my own nano-hedge fund out of my HBD 3 room flat ;)


    ReplyDelete
  8. Alamak! i have bought a WL for my son at 2 years old.

    Myself & wife when my son's policy was bought.

    Now he is 28 years old and we still have the policies intact.

    With FD rate so miserable, it seems a bargain to keep the WL policies.

    Anyway consider policies now forced saving.

    Anything more than that is a "BONUS", which we all hope not to claim until a ripe old age.

    Another words, they are legacy products for family now.

    ME stupid huh?

    ReplyDelete
    Replies
    1. Hi Temperament,

      Wah, dun suan me like that leh. You so high level, who will think you are stupid? As SMOL and WJ rightly put it, WL is savings ma. Force you to save is good but must manage expectations, cannot expect super high returns. I am sure you are doing the right thing for your family!

      Delete
  9. Sorli! Sorli!

    Completely no intention!

    Talk straight 99 & 1/2 the times except ...(i also don't know when i want to bluff someone.)

    ReplyDelete
  10. Really, i think i was stupid to buy WL for my son at 2 tears old.

    But it is very cheap premium till today.

    On the other hand cash value is proportionally very little compare to mine and wify's.

    Actually i have bought it just in case he needs the money at 18 or for further education and i happen to have no money.

    At that time i just started to learn how to swim or sink in the Market leh.

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    1. Hi Temperament,

      Hahaha, you not suan-ing me can le. Don't know how to bluff people is even better!

      Well, it is definitely cheap premium for today thanks to inflation. I don't think it is considered cheap when you bought it many years back.

      Everyone got their mistakes, mine was ILP, even worse. At least you can treat WL as passive savings and just leave it alone. Now you can guide him on what he should buy himself, that's a valuable lesson :)

      Delete