Wednesday, September 16, 2009

The FIRST Life insurance - a Whole Life Plan


Although Buy Term Invest the Rest is a better option but generally the first life insurance you should buy is a Whole Life Plan.

Typically such a plan runs until you die so its an insruance for them, not for you. One of the facts that some may overlook is that you will have to pay the premium your whole life too. However, the quotation is usually presented in a way that you pay a number of years and then the policy will be able to substain itself. Traditional policy would actually take a loan from yourself by paying interest to the insurance company. Which is usually viewed as a big disadvantage in personal finance planning. However in this article, it works towards our advantage, at least for 'most of us'.

Lets start by reviewing Buy Term Invest The Rest (BTITR), although it works best ideally but in real life when will it work and more importantly when will it NOT work ?

Statistically and historically, most people who practises BTITR starts with buying term insurance and almost certainly did not ends with investing the rest. Everyone has ups and downs in their lives. During the downs time, almost everybody's 'Buy Term' is stopped not to mention there is no such thing as '... The Rest' when cash flow is tight.

What is the ONLY requirment in BTITR to make it a success ? DISCIPLINE ! And guess what human nature is lack off ? DISCIPLINE !!

So if you have been having discipline your entire life up to this point, congratulation, you can start your first life insurance as BTITR. Else, buy a whole life insurance plan instead. You can always BTITR for your subsequent plans and just in case when lack of discipline really screw you in future, you still have at least one plan you can always fall back to - as a safety net.

This way, the worst it could become is you earn less but you are almost guarantee a fail safe approach. Strategically it puts you in a very good position even to start with.

If you are one of those who asked, "Term insurance premium increases as age increases" then you should buy the Whole Life Plan instead. Because you didn't really understand BTITR where the 'Invest The Rest' part should have ironed out this problem.

If you asked, "Should I buy term insurance until age 50 ro 60" then BTITR is also not for you. the 'Invest The Rest' part should usually take over the 'insurance' part after 15-20 years. If you didn't see that in your thoughts, you should be better off with a simply assuring whole life plan, although slightly more expensive.


Today Investment Link policy can also be quoted as a whole life plan. The good thing of investment link whole life plan is the elimination of policy loan - taking money out from your own plan to pay your future premium does not cost too much extra than just the unit price calculation. However, a badly configured link policy can lapse by itself when the market price goes too low. So a traditional whole life plan is implicitly having more assurance than investment link whole life plan.

Another rule of thumb to make your life easier, if you can pay high premium for your first policy, take investment link whole life plan. If you plan to pay minimum premium, then go for a traditional whole life plan.

Lastly, if you know you haven't been discipline but you are sure that you can be and will be from now on, do me a favor, buy a whole life plan now and then do the BTITR thing a couple of years later. 20 years later if your BTITR really does better than your whole life plan, come claim the 2 years differences from me.

4 comments:

grassonleaf said...

hi, can you explain further on this-'Traditional policy would actually take a loan from yourself by paying interest to the insurance company'.

Another point that i dont understand,
'If you can pay high premium for your first policy, take investment link whole life plan. If you plan to pay minimum premium, then go for a traditional whole life plan.'
I thought investment-linked policy always has lower premium than traditional policy? (at least for the first 10years of policy?)

Michael Tsen said...

whole life policy usually requires whole life premium payment too, on the years you don't pay, insurance company will take money out from your policy to pay the premium, in such cases, they treat it as you are borrowing money from the policy and hence you will have to pay interest on it, usually higher than FD lower than BLR.

IVL policy that has lower premium than traditional ones are the ones that may lapse on the years to come when the market crashes again in future. Therefore not suitable in this article as the First life insurance where one can buy and keep easily for life.

TheCurious said...

pay someone interest to borrow own monies ?! That's the worst thing in one's financial endeavour.

Michael Tsen said...

indeed, but its still better than those who owe credit card debt and didn't save at all.