When it came to reducing the insurance components of my Investment Linked Policy (ILP), I learnt that I had to still pay for the minimum death benefit of $170,000. The premium is $126 at 34 years old, increasing to $14,600 at 85 years old. Over 50 years, the total premium is $164,000, which is close to the death benefit. This more or less is a rough gauge how ILPs calculate the premiums. However, if I live beyond 85 years old, the premium for the next 10 years will grow at an exponential rate. I would have to pay $16,000 at 86 years old and $33,000 at 95 years old. The total premium over that 10 twilight years is about $240,000!
Initially my calculations were against a $80,000 death benefit. After revising the death benefit to $170,000, which is double, the benefits were not that far off, probably because there is still sufficient runway to benefit from effects of compounding.
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| $80,000 death benefit: breakevens at 3% annual return over 60 years |
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| $170,000 death benefit: breakevens at 4% annual return over 60 years |
I went ahead to submit my application to remove the Critical Illness and Early Critical Illness insurance components. The $170,000 death benefit includes Terminal Illness and Total and Permanent Disability (TPD). I also removed the riders for female illness, medical reimbursement, and accident.
However, in view of the high up front cost of an ILP, I decided to retain the crisis waiver rider, which cost 10% of the premium paid or $269.90/year. I estimate that I will need to keep it for another 15 years (or when the cash value exceeds the premiums paid, whichever happens earlier) where all ILP premium payments will be waived for life in the event of Critical Illness. If I were to terminate the ILP now, I will lose about 8k. Most of the agent's commissions are paid from the first 3 years' premium. As I am in the 4th year, the additional loss I incur is marginal. If I terminate the ILP next year or any other year, I will probably lose about 10k. Going back to the calculations, the ILP will break even at year 18 assuming a return of 3% or 4%. Difference is slight because the compounding effect can only be seen after 30 years. As such to mitigate any losses from early termination of the ILP plan, I must have enough money to sustain it. For now, I will treat the $269.90/year as a "Critical Illness term plan" that pays out $2,699/year for life as a benefit. It is expensive and I will definitely terminate it when I have secured my passive income flow.
What I had learnt: I bought it with the intention to diversify my investment portfolio. This product was created with the US tax system in mind where the capital gains from investments and estates of dead persons are taxed. The rich people bought such ILP plans to avoid tax legitimately. Insurance payouts are not taxed. This plan works around the insurance policy requirement where 1% of the value must be used to buy insurance. In Singapore, there is no estate or capital gain tax. As such, there is no need to buy an ILP to avoid tax. I do not mind buying a whole life plan, like this ILP I bought, but I think that it is not necessary if I can manage my cash flow well. I will still prefer the ILP over fixed term whole life plans where you pay a fixed amount for 10 or 15 years, and it pays out a fixed death benefit upon death. The ability to allocate 1% to insurance and 99% to investment makes it a really powerful investment vehicle to force one to save, provided one has life's runway to accumulate and benefit from effects of compounding.
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