Saving my ILP - Part 2

In Part 1, I showed a high-level strategy of what I intend to evaluate and how my Investment-Linked Policy (ILP) Whole Life Insurance plan could still serve a minimal whole life insurance need while maxising investment returns.

I would like to provide a zoomed-in view of the graph I last showed in Part 1, before proceeding with the cost benefits analysis on the insurance components.

The reason I decided to zoom-in to a section of the graph was because I thought that I should also see where the growth overtakes for the different projected yields. This is just a theory exercise because in reality, yields are never constant. The graph shows that between 48 years old (16 years later) to 55 years old (22 years old), if I decide to surrender the policy, I will be able to regain around the same capital regardless of the yield. However, after 55 years old, when the compounding effect becomes more obvious, there could be a increasingly high opportunity cost to surrender the policy.

Just a recap on the strategy: First, maximise the accumulated benefits of investing "early" (or create a situation to make it behave that way) which is what ILP is good at. Second, move insurance components into a term insurance, and cut down unnecessary insurance items. Now, I will address the second part by first establishing needs of various kinds of insurance products.

In Whole Life Insurance -- What made me buy it?, I prioritised a list of saving and insurance requirements with explanations. I will list the key points here.

Needs (necessity)

1. Medishield
2. Private shield that sits on top of Medishield
3. Piggy bank of 3 months salary
4. Personal development
5. HDB mortgage insurance

Wants (good to have)

1. Term life insurance
2. Emergency fund of 9 to 12 months salary
3. Children's education
4. Opportunity fund to buy in market crashes
5. Retirement fund -- top up SRS and/or CPF
6. Whole life insurance

With my priorities as the premise, I tackle the insurance components one by one.

First, term life insurance is something which I will definitely want to buy because I have dependents. The "industry practice" is 5 to 10 times of your annual salary, but it also depends on the number of dependents you have. As my priority is to spend the bare minimum, I chose $500,000 death benefit. This is because I will just need to probably fund "children's education" expenses. My other savings from CPF, SRS, investments, etc., should be decent by then too. Of course, I will work hard to eat well, exercise, reduce stress, etc, and live a long life, so this is mainly for accidents.

Second, critical illness insurance is something which I will want to buy because I have dependents, but the initial thought was to offset medical bills rather than to pass the benefit to my dependents. I chose $300,000 critical illness benefit for this evaluation exercise. After calculations, I am actually thinking of not buying this because I am already paying for a rider on my private shield that covers 100% private hospital single-bed wards' hospitalisation bills (which covers a much wider scope than critical illnesses so it is more worthwhile). In the event of critical illness, my medical bills will be fully covered, and if I am really that sick, I will want to live more than have a lump sum of cash which cannot save my life. If I am at the end stage of some critical illness, I would probably check out soon and death benefit will kick in. Critical illness premiums are also very expensive, probably because few people buy it. :P

I tabulated the cost of the death (D), terminal illness and permanent disability (TPD) and critical illness (CI) charges based on $1,000 sum assured to normalise the cost between paying the premium through a whole-life plan, 20-year term plan, and 10+10 year term plan. 10+10 means I buy 10 years first, then 10 years later, I buy another 10-year plan. I decided on a 20-year term because I assume that I would have built up my retirement fund and children education fund sufficiently by 55 years old. This will also free up more cash now to channel into investments.

Findings:

1. Paying for D, TPD, CI charges through a whole-life plan is substantially more expensive than a term plan for the age range described -- 34 to 53 years old.

2. Paying for a 20-year term is cheaper than a 10+10-year term. This could be extrapolated to buying 30-year term being cheaper than 10+10+10 or 20+10.

Conclusion:

If the intention of insurance is just to cover yourself for unexpected circumstances during your critical child rearing years, a 20-year term plan might be sufficient, and recommended to be started only after you have your first child, so as too free up as much cash as you can to invest and accumulate returns early.

Getting a rider top-up for your private shield plan is a better option than buying critical illness or early critical illness cover, if you intention is to defray medical bills. If your intention is to get lump sum cash, which the private shield rider would not be able to provide, then you have to weigh the benefit of paying $18,600 for a $300,000 benefit, that will occur with a 1% (based on my memory) probability for this age range. I will dig further for research data to see what the actual probability is.