$$$ KPO and CZM $$$: Whole Life Insurance - Do We Really Need Them?

Friday, April 12, 2019

Whole Life Insurance - Do We Really Need Them?

A few weeks ago, a friend approached me and asked for my advice on a whole life insurance plan that his agent tried to sell him. He is not finance/investment savvy so as much as I would like to tell him to "buy term insurance and invest the rest", it is definitely not something he is going to be comfortable with.

Another reason why he is more interested in whole life as compared to term insurance is that he wants the cash value that comes with it. Majority of the people want something back after paying all those premium for many years. Anyway, I got him to send me the policy/projection document.


The policy is Family3 by Great Eastern. My friend will have to pay a $6,000 annual premium for the next 15 years and the minimum sum assured (death benefit) is $87,745. Once the premium term ends, he will be getting a guaranteed payout (2% of the sum assured) for the rest of his life.

Death Benefit
Surrender Value
Illustrated Yield upon surrender based on non-guaranteed projection
Survival Benefits + Cash Bonus
Anyway, I copied the above tables in the policy document to a spreadsheet for easy reference and comparison. When I looked at the illustrated yield upon surrendering the policy, the return is simply poor. A random thought then came into my mind - can we use CPF SA as a substitute for whole life insurance?

We can answer this question by looking at the concerns whole life insurance can address:
- Leaving a sum of money behind for the family/dependants upon death
- Getting back some of the money/premium after X number of years (term insurance cannot fulfil)

Anyway, I went ahead and projected what my friend will be getting if he were to use the whole life insurance premium to top up his CPF SA instead. It is worth noting that I have excluded the tax savings one can get when topping up their CPF SA for ease of computation/comparison too. You can read this to find out more - CPF RSTU - Is It Worth It?

For the benefit of the doubt, I will also be using the higher non-guaranteed (4.35%) projection for all comparison too.

Upon Death


From the first year to year 12/13, the whole life insurance provides better coverage but after the crossover point (year 12/13), one can expect to leave behind more money simply by topping up their CPF SA. In my opinion, the risk can be easily mitigated by purchasing a term insurance at a fraction of the cost for similar/higher coverage and cancelling it after year 12/13 (totally optional) to ensure death coverage throughout. This particular insurance is also interesting because the insured person will receive an annual payout as part of his survival benefit (similarly, there are both guaranteed and non-guaranteed). However, even after adding all the survival benefit, CPF SA still provides a higher guaranteed return/coverage upon death.

If you have been influenced by fake news previously, thinking that one will never get back their CPF even upon death, read this - What happens to your CPF savings when you pass away?

Upon Surrendering Policy


Now if you plan to buy a whole life insurance with the intention of surrendering it eventually to get the cash value back, please don't. You will be losing money almost all the way because the comparison uses the "best" case non-guaranteed scenario.

This may/may not be true for the other whole life insurance but I am pretty sure the return will be higher with CPF. Having said that, don't take my words for it, go ahead and calculate/project it yourself. In the end, my friend decided not to get the whole life insurance too.

So what are your thoughts? Do we really need whole life insurance?

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2 comments:

  1. Hi,

    I think there is a use for whole life policy, and it's just wrong to see it as investment. One adv for whole life is a kind of forced savings. If someone wants to buy term he should invest the rest. But if he isn't interested in the investment part, then putting it in whole life isn't such a bad idea. Another reason for whole life is to have some cover for CI beyond the age cap of 60 or 65 for term plans. I don't buy the idea that once we hit that age, we dont need to care for CI because it's still money that we have to fork out.

    The idea solution is to layer a insurance portfolio with a bit of everything. My whole life plans covers a base that will last me beyond the age cap for term. Then I top up heavily with term plans and ci coverage. Add another layer for disability income and of cos hospitalisation plans.

    There is a always a use for each tool; just don't use the wrong tools for the wrong purpose.

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    Replies
    1. Hi LP,

      It is not just about seeing it as investment. Like I mentioned, if the concern is leaving a sum of money for dependents upon death or having some cash value when surrendering the policy, there are better alternative. Otherwise, like you said get term which then goes back to the point of do we really need whole life?

      To your CI point, there are standalone CI plan and I don't see the need to bundle it together with a whole life. Adding other riders/CI to whole life complicates the equation and can no longer be compared like above.

      At the end of the day, it is also about maximizing the value one can get and what one believes in :)

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