maniac Wrote:Hi, my opinion is that -buy a term policy and invest the difference - may not be suitable for all people.
That is true. For a small minority of people a "buy term and invest the difference" approach may not be suitable. However
a whole life plan is clearly unsuitable for most people given the higher costs and lower expected returns.
maniac Wrote:a. Not all can invest regularly and consistently, or/and DCA through unit trusts/index funds, for 20-30 years through the many market cycles.
This merely requires the same discipline as that needed to keep paying the whole life premium. Nobody is asking you to pay more. You are paying exactly the same amount of money out of pocket. The difference is that instead of paying only one party (the insurer) you are paying 2 parties, the insurer and yourself.
maniac Wrote:b. After investing for many years and when you need to cash out and it is year 2008, your returns will not be good compared to an endownment or life plan.
Do you have statistics to back up this assertion? If you invested for "many" years and did not do well, what makes you think the endowment or life plan would do better, given that the endowment or whole life plan was invested in essentially the same assets, but had higher expenses?
I already covered the differences in expenses previously, but basically with whole life or endowment you lose a big chunk upfront because of the commission. With term you only pay commission on the much smaller insurance premium. Then, every year the whole life/endowment policy costs at least 1.5% more to operate. Over time this 1.5% advantage (per year) translates to a big difference in realized returns.
A realistic long-term return for the overall stock market might be 5-6% annually. Let's say 5.5%. Index funds or ETFs would cost at most 0.5% per year, so the investor could expect 5% annually. On the other hand the whole life and endowment plans cost at least 2% per year to run, so the policyholder can only expect about 3.5% per year. Over 20 or 30 years this is a huge difference.
$1,000 invested annually at 5% per year becomes $33,066 after 20 years.
$1,000 invested annually at 3.5% per year becomes $28,280 after 20 years.
The difference is 17% in favour of buy term/invest the rest, assuming a 1.5% per year difference. The actual difference is larger because with the whole life and endowment plans you don't even have the full $1,000 working for you from day one - you lose almost all of the first year's premium to commissions. That's why when you terminate in the early years you get nothing back - because everything went to commissions and expenses!
This is also not taking into account the extra flexibility afforded the buy term/invest the rest investor, who can temporarily reduce his investment if he encounters a personal financial crisis, or increase his investment as his investible funds and/or risk appetite increase.
In contrast, a whole life or endowment plan cannot be reduced. The policyholder can only borrow money against the plan (and pay interest). If he converts the plan to paid-up status or terminates it, he cannot reinstate it later. And of course he cannot increase his "investment" later on except by buying another policy.
Whole life or endowment plans only make sense for 2 groups of people:
1. Insurance agents who earn commissions from SELLING such plans; and
2. Policyholders who want to have LESS wealth and LESS flexibility
There are plenty of insurance agents out there who will encourage you to buy whole life and endowment plans. But I presume we are talking about policyholders, group #2. I am not sure how many such people exist, but it takes all kinds to make up this world, so yes, I suppose there is
somebody out there who deliberately wants to be financially worse off.
As usual, YMMV.
same reason as urs! introduced by a fren...