Saving my ILP - Part 5

This is a continuation from Part 1, Part 2, Part 3, and Part 4.

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.

$80,000 death benefit: breakevens at 3% annual return over 60 years

$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.

Saving my ILP - Part 4

It has been four months since I drew up my strategy to save my ILP and I am glad that the insurance industry isn't as bad as I had expected.

I consulted an independent insurance broker, ok, maybe not really really independent, but I tried my best to source for an independent broker and I found one (yes, after four months). Some criteria I had was the person must be rich and contented to not want to take advantage for me. The person does not try to sell me products that I don't need. This made my search very hard because it meant that I need to look for the person, instead of the usual salesman/salesgirl trying to grab you while you are shopping. I willingly heard sales talks from Manulife and Great Eastern, but none met my requirements. Google for independent financial advisory services, that was where I got some leads.

The broker shared that in the market, only Prudential and Great Eastern protect their agents and do not allow brokers to sell. All others, including the (rather expensive) AIA, are available through brokers. According to the broker I spoke to, the brokers' commission is lower than the agents who represent the company, because brokers have no vested interest. This met my criteria that the person is likely to offer me the most value for money deal in the market to convince me that it's good and cheap so that they can close the deal.

Just to recap, my Investment Linked Policy (ILP) had $100,000 death benefit, critical illness, early critical illness cover each. I also had riders: $50,000 accident, $1,000 medical reimbursement, $10,000 female illness, and premium waivers. The yearly premium is $3,317.

What I will do in four months' time after my new policies are in-force, is to minimise the ILP  insurance coverage to just $80,000 death benefit and make it an investment policy. My revised yearly premium will be $2,699 (-$618). That translates to a saving of $18,540 over 30 years. That lean and mean investment policy can then give me potential returns that I had earlier calculated in Part 1:

Assuming I live a long life until 95 years old, exceeding the average life expectancy of 85, at a 3% yield, I could also surrender the policy after 13 years to break-even.

Now I share a little about my cost comparison. Based on mortality charges listed in the ILP, the total premium cost is $197,000 over 30 years, versus term insurance premium of $57,000 (30% of the ILP premium) over 30 years for the following coverage:

• $1M death benefit (30 years)
• $300,000 critical illness benefit (30 years)
• $100,000 early critical illness benefit (term 20 years)

I was contemplating whether I should also terminate my more expensive 20 year Term Life policy ($500,000 benefit) for a cheaper equivalent to save $440/year. The savings would be depending on how much coverage I want to have too. I decided to retain it. I was also deciding between 20 and 30 year terms. I decided on 30 years for coverage up to 65 years old, which will be the retirement age in a decade or so. Critical illness cover also does not really make sense beyond 65 years old in an ILP. I think I will feel a bit "naked" if my term plans all end at 55 years old and I am still working. Another morbid thought was that the chances of falling sick between 55 and 65 years old is also higher than 35 to 55 years old, so I should extend my coverage to the maximum possible. Getting struck with critical illness at 60 years old will be a terrible experience if all my term plans had terminated and I would have felt that I wasted tens of thousands of premiums. If I get struck with critical illness at 70 years old, I will probably tell myself that I am too old and expensive to be insured.

A ball park figure of a $1M death benefit is cheaper than a $500,000 death benefit on a per dollar basis. Although I contemplated a long time whether I will need $1M death benefit, As $1M will be $500,000 after 30 years of inflation, I thought that it was a reasonable sum. I also decided to retain the 20 year term life policy for $500,000 death and accelerated total permanent disability (TPD) benefit, mainly because I had money to spare and my life is probably worth more than $1.5M at the moment, in terms of opportunity cost. The financial adviser introduced me to a concept of projected net worth at retirement age of 65 years old if I continue my earning, saving, spending and investing habits. At 65 years old, I will supposedly be valued at $2.4M and have more than enough money to retire.

Next was how much coverage I will need for critical illness and early critical illness. I decided on $300,000 for critical illness and $100,000 for early critical illness. The total cost is at least an additional $2,088/year and $1,472/year after 20 years. I decided to ditch the accident insurance. [Edit: premium amount updated on 1/8/2015]

New policies that I will buy at a cost $2,088.

• $1M death benefit (30 years, up till 64)
• $500,000 TPD benefit (accelerated, meaning consumes from the death benefit) (30 years)
• $300,000 critical illness benefit (30 years)
• $100,000 early critical illness benefit (term 20 years)

Existing policies that I will keep at a cost $3,139.

• $80,000 death benefit + investment component (whole life)
• $500,000 death benefit (20 years, up till 54)
• $500,000 TPD benefit (accelerated) (20 years)

I will be dropping the riders that costs $618/year. Total cost will be $5,227/year now, which is within my current annual dividend income from equities, so I feel that I do not need any income replacement insurance now.

Private shield plan is now $700/year (but increases with age) for 100% private hospital single-bed ward coverage. This will gradually increase to ~$4,000/year at 65 years old and increase by $400/year every year to ~$13,000 at 85 years old. I did a comparison between term plans terminating at 65 and 75 years old. The total cost is double for the last 10 years. I would rather force myself to exercise and eat healthy instead. Therefore, I had decided to stop all the term plans by 65 years old, which is the expected retirement age.

[Edited on 1/8/2015 with revised term plan cost.]

CompareFIRST - Insurance Comparison

The first thing I was looking for was the cost for Critical Illness but I could not find it.

There were Whole Life, Term Life, Endowment, Investment-Linked Policies (ILPs), and a new category called Direct Purchase insurance products, which is quite similar to buying insurance online directly from the insurer.

Pros
You can see at one glance which Term Life is the cheapest.

You can see at one glance which endowment has the highest guaranteed payout for the premiums paid.

This is probably the most straight-forward case.

Cons
It is not so clear when one selects "Yes" to Critical Illness cover. In the search results, I got some with mortgage insurance, some with accident and terminal illness, one says there is a choice of 4 plans (how can there be a choice if there is only 1 price listed?), one as Total and Permanent Disability (TPD) and premium waiver benefit. I did not have the patience to scroll and read all the search results.

It is also difficult to compare the distribution costs across different products.

Overall, it is a good attempt. I would prefer they put in some recommended insurance based on typical average Joe scenarios for people to have a rough gauge of how much insurance one ought to buy.

Saving my ILP - Part 3

In Part 2, I compared the cost of insurance under an Investment-Linked Policy (ILP) Whole Life plan versus term insurance and deliberated that maybe it will not be cost effective to sign up for a critical illness (CI) and early critical illness cover because the cost forms approximately 1/3 of the benefit payout.

I went ahead to sign up a 20-year term insurance plan for death and terminal illness & permanent disability (TPD) $500,000 combined coverage so that I can reduce the proceed with my plan to reduce the insurance components in my ILP. As insurance have a no-claim 90-day clause, I had to sign up for the new insurance first then reduce the coverage for the ILP after 90 days. I decided to stick with Prudential purely out of convenience.

I learnt that the insurance items are actually sold as a bundle to look cheaper, which means if I were to claim $500,000 for TPD, the policy will be terminated, and there will be no death benefit. If I were to add on a CI benefit, the CI benefit paid out would be deducted from the total death benefit sum. For example,  If I buy $500,000 death and TPD, and add on $300,000 CI coverage, after I claim the CI benefit of $300,000, I will be able to claim the balance of $200,000 for death of TPD. If I do not opt for this bundled plan, individual plans will be more expensive. This explains why the CI cost was lower in the term insurance comparison in Part 2.

I further enquired about buying CI term insurance and found out that the minimum benefit is $250,000. From this aspect, the ILP is "better" than term insurance because ILP sells CI benefits at a minimum benefit of $80,000. This new development actually sent me back to my drawing board to re-assess how much I should really spend on CI. I also checked that if I were to be eligible to claim CI benefit, and I also have early CI coverage, I would be able to claim early CI as well, even though the illness could qualify as CI. It was also possible to just buy early CI without CI as a standalone policy. There is also a chance that you do not claim CI at all if the cause of death was not attributed to critical illness. At this point, buying early CI may be a better choice as the chances of claiming the benefit is higher, so I dived into the cost comparison for these components.

Cost to insure $1,000 benefit vs Age

I decided to plot a graph to see how the cost to insure for every $1,000 benefit increases with age. I asked my insurance agent what convinced him to part with his money to buy early CI insurance that costs probably half the benefit payout in the event of a claim. He said that it was a "job hazard" because he gets to see what types of claims get processed. If you work in the Accident and Emergency department of a hospital and see young people admitted for all sorts of illnesses, your perception of reality gets skewed a little. It is psychological.

Looking at statistics published by Ministry of Health, I first took a look at the death statistics. There were approximately 19,000 deaths in 2013. Cancer taking top spot accounting for 30% of deaths is sometimes publicised as 1 in 3 die of cancer but this is blown of a proportion because you need to be in the 19,000 sample pool first. 19,000 out of a 5,000,000 population is 0.38%. Of course the nearer one is to the average life expectancy (Male 80 years old, Female 85 years old), the higher the chance.

Hospital admissions count was approximately 483,000 in 2013. Assuming a 5 M population, this represents 9.66% of the population. This should be sufficient to convince anyone to buy hospitalisation insurance.

At this point, Assuming the worst case scenario that all hospital admissions are for CI, the probability of a CI event can be safely assumed to be <10%. Next we look at admission percentages. For the age group of working adults 15 to 64 years old, it is approximately 50%. This will mean that probability of working adults being admitted is <5% (10% x 50%). If we further assume that cancer occurrences are 1 in 3, probability of a working adult being admitted because of cancer is probably <1.5% (5% x 0.3).

Maybe there could be other ways to insure against income loss due to illnesses. I may source for other insurers to check the costs too.

Saving my ILP - Part 2

In Part 1, I showed a high-level strategy of what I intend to evaluate and how my Investment-Linked Policy (ILP) Whole Life Insurance plan could still serve a minimal whole life insurance need while maxising investment returns.

I would like to provide a zoomed-in view of the graph I last showed in Part 1, before proceeding with the cost benefits analysis on the insurance components.

The reason I decided to zoom-in to a section of the graph was because I thought that I should also see where the growth overtakes for the different projected yields. This is just a theory exercise because in reality, yields are never constant. The graph shows that between 48 years old (16 years later) to 55 years old (22 years old), if I decide to surrender the policy, I will be able to regain around the same capital regardless of the yield. However, after 55 years old, when the compounding effect becomes more obvious, there could be a increasingly high opportunity cost to surrender the policy.

Just a recap on the strategy: First, maximise the accumulated benefits of investing "early" (or create a situation to make it behave that way) which is what ILP is good at. Second, move insurance components into a term insurance, and cut down unnecessary insurance items. Now, I will address the second part by first establishing needs of various kinds of insurance products.

In Whole Life Insurance -- What made me buy it?, I prioritised a list of saving and insurance requirements with explanations. I will list the key points here.

Needs (necessity)

1. Medishield
2. Private shield that sits on top of Medishield
3. Piggy bank of 3 months salary
4. Personal development
5. HDB mortgage insurance

Wants (good to have)

1. Term life insurance
2. Emergency fund of 9 to 12 months salary
3. Children's education
4. Opportunity fund to buy in market crashes
5. Retirement fund -- top up SRS and/or CPF
6. Whole life insurance

With my priorities as the premise, I tackle the insurance components one by one.

First, term life insurance is something which I will definitely want to buy because I have dependents. The "industry practice" is 5 to 10 times of your annual salary, but it also depends on the number of dependents you have. As my priority is to spend the bare minimum, I chose $500,000 death benefit. This is because I will just need to probably fund "children's education" expenses. My other savings from CPF, SRS, investments, etc., should be decent by then too. Of course, I will work hard to eat well, exercise, reduce stress, etc, and live a long life, so this is mainly for accidents.

Second, critical illness insurance is something which I will want to buy because I have dependents, but the initial thought was to offset medical bills rather than to pass the benefit to my dependents. I chose $300,000 critical illness benefit for this evaluation exercise. After calculations, I am actually thinking of not buying this because I am already paying for a rider on my private shield that covers 100% private hospital single-bed wards' hospitalisation bills (which covers a much wider scope than critical illnesses so it is more worthwhile). In the event of critical illness, my medical bills will be fully covered, and if I am really that sick, I will want to live more than have a lump sum of cash which cannot save my life. If I am at the end stage of some critical illness, I would probably check out soon and death benefit will kick in. Critical illness premiums are also very expensive, probably because few people buy it. :P

I tabulated the cost of the death (D), terminal illness and permanent disability (TPD) and critical illness (CI) charges based on $1,000 sum assured to normalise the cost between paying the premium through a whole-life plan, 20-year term plan, and 10+10 year term plan. 10+10 means I buy 10 years first, then 10 years later, I buy another 10-year plan. I decided on a 20-year term because I assume that I would have built up my retirement fund and children education fund sufficiently by 55 years old. This will also free up more cash now to channel into investments.

Findings:

1. Paying for D, TPD, CI charges through a whole-life plan is substantially more expensive than a term plan for the age range described -- 34 to 53 years old.

2. Paying for a 20-year term is cheaper than a 10+10-year term. This could be extrapolated to buying 30-year term being cheaper than 10+10+10 or 20+10.

Conclusion:

If the intention of insurance is just to cover yourself for unexpected circumstances during your critical child rearing years, a 20-year term plan might be sufficient, and recommended to be started only after you have your first child, so as too free up as much cash as you can to invest and accumulate returns early.

Getting a rider top-up for your private shield plan is a better option than buying critical illness or early critical illness cover, if you intention is to defray medical bills. If your intention is to get lump sum cash, which the private shield rider would not be able to provide, then you have to weigh the benefit of paying $18,600 for a $300,000 benefit, that will occur with a 1% (based on my memory) probability for this age range. I will dig further for research data to see what the actual probability is.

Saving my ILP - Part 1

This post will document my thoughts and decisions behind how I will proceed with saving my Investment-Linked Policy (ILP) Whole Life Insurance from become "trash" or "useless".

There are two parts of this strategy. First, maximise the accumulated benefits of investing "early" (or create a situation to make it behave that way) which is what ILP is good at. Second, move insurance components into a term insurance, and cut down unnecessary insurance items. This post will address the first part only.

My agent had been very accomodating to my requests to generate many benefit illustration documents and answering all my questions about whether the ILP rules allow me to make the adjustments. Thankfully, the plan is quite flexible.

Step 1: Reduce all insurance coverage to the bare minimum to keep the essential riders alive. I actually just wanted the PruSmart Lady benefit for the free health check up. (Ok, it is quite silly thinking back now that I bought an ILP because I expect health check up prices to go up in the long term, but it may not be all that bad if you read till the end of this post!)

Step 2: Calculate how much sales charges have been paid out. As I had paid three yearly premiums, I had paid majority of the sales charges, so if I can still afford the premium, it does not make sense to reduce the premium because I will be effectively locking in a loss. Separately, when I reduce the premium from $2,699 to $1,200 (the minimum), there was insufficient runway to accumulate the investment returns. As such, I had to create a runway for myself by investing more every year to make up for the "lost" years.

Summary of projected cash values look healthy at the age of 95 years old. As I always think of worst case scenarios, I need to calculate break-even values for everything. A 3% yield will break-even at any age.

For those who prefer graphs, the points plot out the growth for various projected yields and if you count the lines, anything 4% and above is good, i.e. if I surrender before I check out of earth, I will be able to get my capital back, and my death benefit coverage could be deemed as "Free".

All yields and calculations displayed exclude sales charges and admin fees.

When will ILP whole life insurance make sense?

Triggered by a comment to draw a chart of mortality charges within Investment-Linked Policy (ILP) whole life insurance plans, I went back to my table and plotted a pretty chart. This is based on female and non-smoker charges. 

From the chart, the line starts to curve at 30 years old, so I enlarged the scale from 1 to 40 years old to get the following chart.

In general, the first 6 years have a slightly higher mortality charge. Hence, the most optimal point to start if after 6 years old, if the intention is pure investment purposes. Lowest premium is at 10 years old.

Hypothetically, not that I am encouraging you to believe me, ILPs might suit the profile of babies, starting from 1 year old. If you are curious to know how much cash value could potentially be accumulated, theoretically, I had compiled a small chart based on present values. This assumes a benefit sum assured of $100,000 for death, $100,000 for critical illness and $100,000 for early critical illness.

All benefit illustration excludes sales charges and admin fees which are variable across a person's life time. While the cash values are eye popping, this exercise shows that the product could have some potential baby customers.

As a parent of a 4 year old daughter, I will not buy this product for my 4 year old either. My reason is that the margin  (minimum 5% + 5% sales charge = 10% returns over 95 years) is not sufficient for my low-risk appetite. Historically, assets like properties, gold and blue chip shares make a better investment for a 95-year horizon. $100,000 will probably be only worth $100 by then?

Reading into my Investment Linked Policy (ILP) - Part 2

In Part 1, I explained at a very high-level how ILP works and highlighted two important risks that are often overlooked. I also overlooked it when I bought the product. As I am writing this, I am also in touch with my agent to learn more about the product to see how I can "save" my product from becoming trash because I hope to lead a good (and long) life. You will understand why I describe it as trash by the end of this article.

This only applies if you have an insurance component to an ILP. For example, life insurance, terminal illness and disability, crisis cover and early crisis cover.

Risk 1: Vary Premium
Risk 2: Reduction in Yield

Big Idea: Insurance premiums are deducted from the accumulated premium you had paid to the ILP seller. In the initial years, you pay more than what is deducted. In the later years, you pay less than what is deducted, but the balance is covered by the excess that had been accumulated. At some point in time, there will not be enough to pay for the premium. What you pay for is what the insurer calls mortality charges.

Mortality charges is a fixed rate determined by your age, gender, and whether you smoke, for every $1000 insured. This is independent of the premium you pay or the age you start the policy. The age you start the policy and the expected sum insured required will be reverse engineered to a premium such that the break even cost looks good on the benefit illustration.

An extract of how the mortality charges look like is shown below.

I transcribed the numbers into a spreadsheet to do a simple break-even chart. The yearly premium listed is the insurance premium based on a benefit sum assured of $100,000 for each condition (Death, Critical Illness, Early Crisis). My yearly premium is $2,699.

Three rows had been highlighted, which basically showed three potential outcomes of the policy. For ease of explanation and understanding, I had left out sales charge and monthly $5 admin charge, but it will be there.

At 55 years old, the insurance premium of $2,727 will be more than my premium of $2,699. I would be inadvertently forced to stop my early crisis insurance coverage if I do not want to top up the short fall. While the agent's argument is that the accumulated investment returns over the past years could cover the premium, I am skeptical (but more on that later).

Assuming I stop my early crisis coverage at 55 years old, I would be faced with a similar decision point at 65 years old, when the death and critical illness coverage premium will cost $2,938, more than the $2,699 premium. Hmph, so I may be forced to stop my critical illness coverage.

Dividing $100,000 by $2,699, excluding projected returns and charges, a break-even point is at 37 years old, which is 32 + 37 = 69 years old in my example. This is a hide-cash-under-pillow scenario.

Assuming I stop my critical illness coverage at 65 years old, so that my policy can still be active, and if I check out of this world at 69 years old, I would probably just breakeven and have been no worse off with hiding cash under my pillow for 37 years. I potentially could have some cash value remaining in the policy, which I actually do not expect to be much.

At 72 years old, my death coverage (also known as life insurance) will cost $2602, which starts to growth rather exponentially. Anything after 69 theoretically means not "worthwhile" because the guaranteed death benefit is only $100,000 no matter how much you plough in. Earlier arguments had also established that it is impossible to think about critical illness coverage after 65 years old, so there really is no benefit to continue with the policy.

Now I come to the last part about why I am skeptical that the accumulated investment returns (also known as cash value) will not be able to cover a lifetime of premiums. If you have a project return that growths in a linear straight line graph, and an insurance charge that grows in an exponential line graph, we cannot confidently guarantee the projected returns cover the insurance premium charges.

Finally, even the benefit illustration provided in the policy document shows it too, although very (smartly) subtlely.

The last line stops at 40, which does not really tell you the whole truth. At 4% projected returns, the cash value will be $9,000. Based on the mortality charge table, you know that insurance premium will cost $10,570, which cannot be covered by the $9,000. This is where Risk 1: Vary Premium enters the picture. I will need to top up the difference if I want the policy to still be active, else it will be terminated.

Finally, at 8% projected return, Risk 2: Reduction in Yield is acted out. If they had really listed the benefit illustration beyond 40 years, nobody would have bought this product.

Revised image as there was a calculation error earlier that showed break-even at 85 years old.

Indirectly, I am expected to check out at 89 years old, and that is actually based on an extremely optimistic projected return of 8% + average 4% sale charge = 12% return. The early crisis charges also stop at 85 years old in the policy document. Just nice.

I will probably have Part 3 after I have managed to "save" my policy. While many people advocate to terminate the plan, switch to term insurance and cut loss early, I am exploring converting this to a pure ILP product without insurance coverage, or minimal insurance coverage, which appears to be the best option at the moment.

Reading into my Investment Linked Policy (ILP) - Part 1

As an advocate of knowledge sharing, I will use a Prudential ILP which I bought two years ago as an example to share and educate my readers about an ILP. The approach I am taking will be different from the typical "Why you should not buy an ILP" or "Why an ILP is bad for you" format; instead, I will explain the ILP details in lay man terms.

Be it an insurance policy or an investment policy, underlying an ILP is a model. By model, I mean that you could visualise a mathematical model that has a set of rules.

Rule 1: Customer pays the ILP seller a fixed premium, either monthly/quarterly/yearly.

Rule 2: Premium is used to buy units of the selected fund based on the prevailing offer/sell price.

Rule 3: Every fund has a buy (from you) price or sell (to you) price. Alike money changers, the sell price is always higher than the buy price. The difference between the buy and sell price is also what is known as "sales charge" which what the ILP seller earns.

Rule 4: For the first 3 years (thereabout), premiums the customer pays are partially paid to their agent as commission. This is clearly, but indirectly, stated in the policy document that you sign.

Rule 5: If there is an insurance coverage requirement by the customer, units are used to pay for the insurance premium. How this works is your units are sold back to the ILP seller every month at the prevailing buy price, so you will have to indirectly pay for "sales charge" again.

Important RISKS in a typical 50-page policy document which your agent will probably ask you to accept and sign without really explaining to you.

Risk 1: Premium is expected to vary, but they did not explain what it really meant.

Risk 2: Reduction in yield is expected at 65 years old, but they did not explain what it really meant.

I will explain these two risks in Part 2.

Disclaimer: Neither am I encouraging or discouraging you to buy this product. I am trying to explain this underlying mechanisms of an ILP.

Whole life insurance - what made me buy it?

I had always been a staunch DISbeliever of insurance. When I first started a temp job before undergrad studies when I was 18, I started to read about insurance and what I had to prepare for the illusive "work life" that was about to begin in a few years.

Firstly, we work for money. Insurance companies and agents work for money too. As such, I saw them as a casino banker where premiums are just odds in the game of life (and death and accidentals and whatever-insured) priced such that they will earn enough to pay their shareholders. In other words, we will likely be at the losing end unless we become an insurance agent to benefit from the system. (It did cross my mind to be an insurance agent at some point, but it was just against my conscience.)

Secondly, nobody will look after our interests more than ourselves. If I were to spend 8 hours a day working hard to earn my salary, I will likely feel more interested to safeguard my money than someone else who did not have to work for it. Imagine how many parents complain about their children spending money without knowing how hard it is to work. Insurance is similar. The agent you engage, may not even earn more than you do, lest have your interest at heart. His priority is probably his commission from the sale because it translates to his livelihood.

With these two reasons, I was sufficiently convinced that I had to be my own financial planner to insure my livelihood. After planning for myself and achieving desired outcomes, I am even more convinced that insurance is a luxury product.

There are different areas of insurance, but most people will likely "need" the same few bare minimum. The "wants" begin at #6. The following is in order of importance (from my point of view).

1. Basic medical insurance: In Singapore, this is called Medishield, which is the bare minimum that every citizen needs and are subsidised to buy by the government. When you do claim, it's a fixed sum, and you have to pay the balance, which can be substantial. Hospitalisation charges are not covered for private hospitals. Premiums are payable through Medisave (under Central Provident Fund CPF).

2. Private medical insurance (top-up of Medishield): In this top-up version of medical insurance, the insuree pays the first $3,000 and co-pays 10% of the balance. The premiums are payable through Medisave. If I earn a gross <$3,000 a month salary, this was the most I will buy.

3. Savings: Save money in your piggy bank. After having your medical expenses covered, a saving regime is essential if you intend to continue to live in expensive Singapore. For this, the cheapest savings plan is to be self-disciplined and set aside a fixed sum every month. For the ill-disciplined, the banks have some savings plan that help you to lock up your money. If you have someone you can trust, do a recurring monthly transfer to their bank account and ask them to hold the money for you. If all options are out, I will say volunteer at an old folks home or any charity organisation for a few months to gain enlightenment. Maybe listening to a few bankrupt or gambler re-tell their stories and regret may make you a little more aware of the importance of savings. Endowment plans are NEVER entirely equal to a saving plans, because you need to have savings that are liquid -- you can draw on them in rainy days. A sizable piggy bank for day-to-day use is 3 months of your monthly salary.

4. Personal development: After you have succeeded in a savings plan, work on improving your own worth with constant skills learning and upgrading and make it a habit, a life long one.

5. HDB mortgage: If you have to take up a mortgage loan, choose the HDB loan whenever possible because it comes with a (mandatory) mortgage insurance that is cheaper than commercially available ones, and more importantly, allows premiums to be paid with your CPF money, which means there will not be additional cash outlay, assuming you do not overstretch your loan in the first place.

The "needs" will end around here, and the "wants" will begin.

6. Term life insurance: At this point, if you are the sole breadwinner for your family, and have children, a term life insurance will become essential. This premium should not be more than 1% of your income. If the sum insured sounds too little, you should start cutting on expenses whenever possible.

7. Emergency Fund: This is for use on rainy days. This amount should be over and above whatever you have set aside for #1 to #6, and be between 9 to 12 months of your monthly salary.

8. Education: Your children's education is important and will likely cost more and more as the years go by, so you might be tempted when the bank or insurance agent tries to sell you endowment policies for education. This will be about the right time to learn how to invest in stocks.

9. Opportunity Fund: Stock markets have cycles and you will not want to miss the party or the boat when it comes, so having a stash of cash for such opportunities will go a long way.

10. Retirement: The Supplementary Retirement Scheme (SRS) allows you to top up your retirement fund with a maximum of $12,750 a year in cash and enjoy tax reliefs. You can withdraw your money from this fund at the statutory retirement age. Topping up your non-working spouse/parents CPF accounts will entitle you to have tax reliefs, so max these out if you are feeling rich.

11. Whole life insurance: Finally, you have sufficiently insured yourself from key areas of your life and if you still feel that you have "spare" cash in the bank that you want to insure more parts of your life, then yes, I will say that it's probably the right time to consider whole life insurance.

I bought my whole life insurance at 31 years old. I actually did not want to buy the whole life insurance, but the product that I wanted to buy ("female medical illness cover") was a "rider" for a whole life insurance plan. After doing my sums, I settled for the lowest plan that had $100,000 sum assured, so that I could buy the "riders". I ended up with other "riders", such as "waiver of premium", "early critical illness cover" and I cannot remember what else. It was also an investment-linked policy, which I did not like, but it came as a package. I did not like it that I could not choose what funds to buy because I did not meet some criteria about "financial knowledge proficiency" because I didn't have a finance degree, finance certifications or work in finance.

Argh! the regulations to safeguard consumers! In any case, I hope this will help you make an informed choice about whether to buy a whole life insurance.