Why You Should Hate Whole Life Insurance
The main reason why you should hate whole life insurance is that IT IS EXPENSIVE.
And we are going into detail in this article, just how expensive it is to buy a whole life insurance plan compared to a term life insurance plan.
For a start, let's compare the real cost of whole life and term life insurance plans.
We will get a whole life that covers the insured for life, and a term life that covers the insured until age 65 (the general ballpoint mark used).
We got the 3 cheapest insurance quotes for each insurance plan from MoneyOwl.
Insured Person Details:
Premium Type: Annual
Sum Assured: $300,000
Critical Illness Coverage: Nope
A whole life insurance plan is on average 10x more expensive than a term life insurance plan.
You could save 90% of the premiums by just opting for a term life insurance plan.
If you bought the term life insurance, you would have paid on average a total of about $15,000 in premiums.
If you bought the whole life insurance, you would have paid on average a total of about $110,000 in premiums.
In total, whole life insurance is about 7x more expensive than term life insurance.
Why People Buy Whole Life Insurance?
Most people that I know buy whole life insurance because of the cash bonuses.
After paying years of hefty insurance premiums, we want to see some returns on our money.
By buying whole life insurance, a portion of the premiums is invested in the insurance companies' funds.
These funds, if lucky, could perform extremely well and can sometimes return us more than the premiums we paid.
Under that situation, when we surrender our policy, we can get our money back at a small profit.
This appeals to our un-financially-wise brain.
That's how many of us fall prey to this penny wise, pound foolish mistake.
The returns on dollar terms, in the thousands or hundreds of thousand, may seem like a good return on investment.
But, if calculated on a percentage term, the returns may not look at attractive as they seem.
Maths Of Whole Life Insurance
Let's take the cheapest term life and whole life insurance plans we got from MoneyOwl for comparison.
A term life consists of protection portion only, while a whole life consists of protection and investment portions.
The term life insurance cost $27.35 per month.
The whole life insurance cost $375.00 per month.
$27.35 covers only the protection portion
$375 covers both the investment portion and the protection portion.
From this, we can guess that $375 will be split into $27.35 (protection) and $347.65 (investment).
If you took that $347.65 and invested in the Straits Times Index (ES3.SI) via a Regular Shares Savings plan, it would have grown to $194,000 by the end of the 25 year period.
This is based on the 4.58% growth rate we calculated from our previous article:
Save in CPF or Invest in SPDR STI ETF?
If the whole life insurance's bonus cannot even hit 4.5%, you might as well passively invest it into the stock market.
If you think about it, when the insurance companies invest your premiums, they are going to invest in funds that invest in stocks, bonds, or REITs.
None of these assets you cannot invest in by yourself.
Furthermore, most of these funds are actively managed, which tend to give lousier returns in the long-term than passive investments (aka buy-and-hold stock market indexes).
Buy insurance for protection, not investment.
Get over the mindset that "if I don't get any money back on my policy, I am on the losing end."
Because you are not!
But if you keep wanting to get money back from your insurance plan, you will probably be on the losing end.
Recommended Read: What Happens After I Join A CPF LIFE Plan?
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