38% of all insurance policies in Singapore are whole-of-life (WOL) participating (PAR) policies, thus making it the most popular type of insurance.
For the purpose of this month’s Digest, we will discuss specifically about WOL policies with a limited premium payment term (PPT).
The benefits of WOL PAR policies with a limited PPT
#1: Coverage is for life, while payment is not
Everyone’s age, income & expense, assets & liabilities, and personal preferences are different. So naturally, it makes a lot of sense to be able to decide the PPT of your policy. And it can range from as short as 5 years, all the way to 35 years. As a general guideline, the lesser commitments after retirement, the better, So most of us usually want to complete the PPT before we hit 65yo. But it is important to strike a sensible balance between a short PPT, and the amount of coverage. For a chosen monthly budget, the longer the PPT, the higher the coverage secured.
#2: Multiplier Benefit (MB) and MB expiry age
It is only in the past decade where policies with a MB have been introduced. It is a great value-for-money type of coverage. Similar to the benefit in #1, depending on our financial circumstances, we can also choose MBs from 2x to 5x to boost our coverage, and up
to the age that we desire (with MB expiry ages from 65 to 80). This is a much more cost-effective way to secure our desired amount of coverage, without having to pay too much premium.
#3: Automatic Premium Loan (APL) feature
Because PAR policies accumulate cash value, this allows the policyholder (PH) to apply for an APL during a financial crisis. The policy’s coverages do not get terminated due to non-payment, and the PH can eventually repay the loan plus interest (5% to 7% p.a.) charged.
The limitations of WOL PAR policies with a limited PPT
#1: ECI and CI coverages are accelerated out from the death coverage
Unlike other policies such as investment-linked policies (ILPs), the ECI and CI coverages here are usually accelerated out from the death coverage as shown:
So if we wish to leave a sum of money for our family after we die, it is recommended that we have a separate policy specially to do that.
#2: Accumulated cash value: Can see, cannot touch
There are 2 ways to access your cash value without having to apply for an APL.
• Surrender part or all of the Reversionary Bonus of the policy. Take note that this will reduce the long-term value of the policy.
• Fully surrender the policy. Take note that the policy’s coverage will also be terminated.
#3: Illustrated Investment Rate of Return (IRR)
The illustrated IRRs p.a. of a WOL PAR policies (3% and 4.25%) are lower than that of ILPs (4% and 8%). Hence, it is easy to misinterpret it to mean that ILPs are better policies. However, there is no such thing as a good or bad policy. Rather, it is about the suitability of the policy. And there are several important factors that need to be evaluated concurrently with the IRR, before we can decide.
If you take fever medication when you have a flu, not only does it not help your flu, but you can also experience bad side effects from the fever medication as it will act more as a poison than a cure for you.
The same principle applies to financial planning. Selecting a policy that doesn’t serve the needs that you have, can have undesirable repercussions, as the policy may do more harm than good.
And since we usually go to a doctor instead of self-diagnosing our ailments, the same should be done when assessing our financial health. Rather than try to self-manage based on articles and videos that you read/watch online, consult a qualified professional instead.
Because things that matter, are worth doing right.
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