TLDR
1. Must buy hospitalization insurance/integrated shield plan
2. BTIR (Buy Term, Invest the Rest)
3. Personally, I believe that CI/ECI riders are unnecessary
4. Forget about Endowment/ILP, use one of the robo-advisors or simply invest yourself
We wanted to get hospitalization insurance/integrated shield plan for Baby Ong as we deemed that to be the most important insurance one should get given the high cost of healthcare in Singapore.
The agent came with a bunch of other recommendations such as whole life, endowment and ILP. His rationale of getting a whole life is because it is the "cheapest" rate/premium one can get at age 0/1, pay 25 years get lifetime coverage, and cash value upon maturity. Endowment and ILP are to save up/invest for the baby education/university fees. I didn't buy it (both his recommendations and the policy). lol.
Let's just run through some numbers using the Aviva PI/product summary as a reference. The whole life insurance costs $1,408.50 and the early CI rider takes up the majority of the remaining premium at $732 per year. In my opinion, there's no need to get $300k ECI for the baby. CI is to cover the possible loss of income so that money will be the least of one's concern when one is recovering from it. Money is definitely not a problem for the baby. We would rather self-insure by saving the premium and investing them to grow our portfolio such that it will be big enough for us not to worry about money too.
These are the breakdown of the surrender/cash value for the whole life policy at different years before year 25 where the premium is no longer required.
Let's just assume using the best-case scenario of 4.75% investment return for the surrender/cash value of the policy. Compare the above with a BTIR (Buy Term, Invest the Rest) approach with a much higher coverage - $1 million.
A simple spreadsheet forecast will show the difference in the total premium paid (~$10k). If we were to invest the difference in premium (the remaining premium after 25 years for the term insurance will be paid out from the portfolio), our portfolio will grow to a sum larger than the surrender/cash value of the whole life policy with an assumption of 4.75%.
Take a look at the difference if we assume our investment will grow at 7% instead. Not forgetting if one were to surrender the whole life insurance to get the cash value, the coverage will cease while we can cash out anytime from the portfolio. It doesn't make sense to buy whole life insurance for the cash value. Play around with the spreadsheet and forecast them yourself - Whole Life vs Term + Invest (For Baby)
Based on the above, we will be getting Baby Ong the $1 million term insurance and will be investing the difference of $100 per month into StashAway 36% risk index portfolio. Although it is the riskiest portfolio, we find it to be relatively safe across 20 years. It simply means there is a 1% chance at any given year that the portfolio might lose >=36% of the portfolio. You can read more about the risk index here.
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| Our StashAway 22% Risk Index Cash Portfolio |
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| My StashAway 36% Risk Index SRS Portfolio |
Why StashAway? I really like their portfolio. It is performing pretty well (notice the XIRR for both portfolios are double-digits as compared to the conservative 7% I used in the forecast above) and relatively safe (lower volatility and the max dropdown are within the respective risk index). Having said that, I had my reservation previously when I first found out about the 40% estate tax issue if one is to invest in the US market - Estate Tax - The Issue Not Addressed By Some Robo Advisors.
However, given that they have openly indicated that a joint account is in the pipeline, I feel more confident that our investment will not be taxed if anything happens to me once I can set up the joint account with CZM. With that, we are now more comfortable with investing more money through StashAway.
Our Insurance and Investment Plan for Baby Ong:
1. Great Eastern GREAT SupremeHealth P PLUS + GREAT TotalCare Elite-P
2. Tokio Marine $1 million Term Insurance with TPD and $100 CI
3. $100 per month investment to StashAway 36% Risk Index Portfolio
In my opinion, if you are spending too much money on various insurance be it for yourself or your children, you will not be able to invest for your retirement. Instead, you will be helping the agent to retire. lol.
Anyway, if you are interested in signing up for StashAway, do use our referral link - KPO and CZM Referral Link. You will get $10,000 free management fees for 6 months and we will get $16!
You might be interested in previous months update too:
- StashAway - December 2020 - $56,721.26
- StashAway - January 2021 - $59,991.38
Do like any of the following for the latest update/post!
1. FB Page - KPO and CZM
2. Twitter - KPO and CZM
3. Click here to subscribe using email :)
4. Instagram - KPO_and_CZM (Did you see those delicious food photos to the right --> Unfortunately, you can't see it on mobile.)
Remember to do some SA top ups for baby. The long period of compound interest will do wonders.
ReplyDeleteHi abc,
DeleteYet to explore that but I think we should top up and max ours first before considering our baby SA. Haha.
Wondering why you prioritise death protection over CI for your baby? Usually death coverage is for liability (e.g. income for the family, mortgage etc) and your baby has hardly any liability.
ReplyDeleteHi HK,
DeleteI guess I wasn't very clear with our intention. So the idea of getting the term insurance now is so that the premium will be fixed/lower. Once Baby Ong reaches ~23 years old, graduated and start working, she will take over the term insurance and integrated shield plan and pay for them herself. The premium for the term insurance will be what I am paying for now which is $385.
If she only starts buying a term insurance then, assuming same coverage, it will probably cost 600/700? If she believes in CI, she can go get it herself then. Hope this explains!
Babies & children do not need life insurance, unless the parents want to get some comfort in the event their kids conk off.
ReplyDeleteWhat they need is medical & maybe CI (preferably if can cover serious childhood-susceptible diseases) ... all via term plans of course.
The agent should have covered the above. If want to talk about life coverage, he/she should examine both yours & wife's, since your baby's livelihood for the next 20 years is dependent on the parents.
If your wife is thinking about stay-at-home-mum, then focus will really be on you, since you'll become the sole breadwinner. If the family's aim is to become self-insured, then can use reducing term or a mixture of reducing & level term plans.
The FA or agent should have done the above, but if he had done so, likely he'll be out of a job soon.
Correct approach for customers, but wrong approach for financial advisers or insurance companies.
Note that most banking services / products are also really crappy, especially those targeted at middle-income & wealthier customers. They are designed for the goodness of the bank & staff (especially senior staff), not for the clients lol.
The idea of getting term insurance definitely isn't for any comfort. If you are a parent yourself, you will know that you will never want anything to happen to them and no amount of money can replace them. Like I explained above, it is more of planning for her future as well. She will take over the policy once she starts working and pay much lesser premium as compared to her peers who only start covering themselves then.
DeleteHahaha. I like that you actually pointed some of the stuff I didn't want to say it out loud. I was thinking whether to show the distribution cost on the policy that the agent recommended vs the term insurance I got and why ECI was added to the term because the distribution cost for it is much higher too. Yes, unfortunately that's the hard truths. At the end of the day, they are running a business and they got to make a profit from the clients.
Hi,
ReplyDeleteThere is absolutely no need for a baby/child to buy a term insurance because the child has no liability at all!!! BTIR's "BT" only makes sense for working adults with liabilities.
The parents should actually be the ones who need to buy additional term insurance to make sure all their liabilities and expenses for all dependents until the dependents are financially independent are covered.
Hope the above makes sense.
Cheers,
Naro
Hi Naro,
DeleteI guess I wasn't very clear with our intention. So the idea of getting the term insurance now is so that the premium will be fixed/lower. Once Baby Ong reaches ~23 years old, graduated and start working, she will take over the term insurance and integrated shield plan and pay for them herself. The premium for the term insurance will be what I am paying for now which is $385.
If she only starts buying a term insurance then, assuming same coverage, it will probably cost 600/700? Hope this explains!
Hi I did compare between term and life before but term can be quite hefty in terms of premium since u have to pay till the term expires? And if the baby were to buy a life (or term) at adulthood the premium would be much higher. For me personally I prefer to buy a life for them with CI cover at a paying 10-15 years premium since I'll still be in my prime working years. Also the hospitalisation plans nowadays do not cover for 100% coverage anymore. If u choose a doctor u prefer that might not be in the panel doctor, co payment can go extremely high and a sum of money (without dipping into savings) can be useful. Of course this is just my opinion and I'm not any FP. If u want to consider a cheap term u can go for the Aviva NS insurance that covers early CI and CI!
ReplyDeleteAs many have said ... baby & children don't need life insurance.
DeleteIf you bought the WL as a savings for your kid, then sorry to say the returns will be pretty crappy compared to what a diversified portfolio can do after the next 20-25 years.
If you bought the WL as a pre-paid insurance for your kid, then most probably it's not enough for his needs. It's not a $1M WL right??
$1M is likely the minimum life cover a poly or uni grad will need as a working adult with dependents (e.g. elderly parents & young kids). So your kid will still need to buy extra life insurance when he's a working adult.
As for 100% covered Shield plans --- S'pore govt should NOT have allowed it in the 1st place. At least they're rectifying their mistake, but a lot of damage has been done.
Singapore was going down the way of US private health insurance. Today, a US adult has to pay annual US$5,500 on average for H&S cover and it comes with average US$4,300 annual deductible and 20% co-payment. This is usually paid by companies as employee benefits. That's why unemployed US people usually have no medical insurance --- they can't afford it.
Hi -,
DeleteIn my article, I have also showed that the total premium for term (despite paying longer) is actually much lesser than the premium paid for WL in that 10-25 years. At the end of the day, the decision is still yours. If buying a WL insurance gives you the comfort/assurance, by all means! Like the other reader has pointed out, the WL insurance you got is unlikely to provide sufficient coverage once they grows up.
Yes, I am aware that the hospitalisation plan no longer provide 100% coverage and that's fine. We should still get the shield plan to minimize the financial impact if one were to be hospitalized for whatever reason. I do agree we shouldn't have 100% coverage too but I guessed it is too late. Just adapt to whatever changes that is coming our way and plan accordingly!
Insurance companies are no dummies. The probability of claim by kids is infinitesimally small. The premiums paid from 0-20 is actually higher than what the actuarial tables indicate ... They have to else the quantums are too small to cover fixed costs.
DeleteAssuming 40-year portfolio returns of a modest 7% per annum, $385 invested annually for 23 years could hit $20,500. If left alone for another 17 years could potentially reach almost $65,000.
If the premium is around $650 in early 20s, $20,500 is equal to over 31 years of premiums. $65K is equivalent to 100 years of premiums.
But anyway these are rounding errors in the bigger scheme of things. I bet your kid will be happier inheriting a $385 cost than a $650 one. And in the meantime you can control her portfolios until you feel she's ready to take over.
Haha. Interesting perspective! If you break it down this way, I can see why term is not necessary if one invest those money instead.
DeleteWhat we had in mind is just to give her the small advantages (cheap term + the money invested in StashAway) once she graduates. For example, I'm grateful that my parents purchased an endowment plan then which allowed me to pay off my university fees without going into debt. CZM on the other hand, graduated with 20k+ debt and that took her a few years to pay it off. So both of us felt that is something we should do/plan for her.