Apr 27, 2004
Go for whole-life cover instead of term policies
WHOLE-LIFE insurance cover is a lot more expensive than term-life, but it is worth it, Dr James Chia believes.
Under a whole-life policy, your loved ones not only get a payout on your death, but the policy also accumulates cash value over time that the policyholder can redeem or borrow against.
Term-life policies do not rack up a cash value, but that means their premiums are much lower.
Dr Chia pointed out that term plans have their place but people should realise the cover usually expires when the policyholder reaches 60 to 65. So they are mostly useful for temporary, short-term needs: for example, if you are going to be posted overseas for a period of time.
Some financial planners advocate buying term plans and investing the difference in order to accumulate cash value that way.
That approach is suspect, Dr Chia said. 'In reality, people don't invest the difference, they spend it. Moreover, take my whole-life insurance of $1.25 million. You'd have to reap, maybe, $1 million in investment returns if you just rely on investing the difference. How many people can achieve that?'
Whole-life plans, on the other hand, make sure you have some insurance in place when you are older and past the period when companies give term insurance.
Nevertheless, term insurance does have its merits, says Dr Chia's wife, Jackie. 'If your salary is not so high, you can take more term plans, which are generally cheaper. When you can afford it, buy whole-life plans.'
He, meanwhile, suggests regular reviews of your insurance coverage. 'The future may not be an extension of the present. If you earn more, increase your insurance in the future.'
Best-selling finance author Suze Orman, however, begs to differ on the loading up of whole-life policies. She believes in term plans, she told The Business Times last year.
Her caustic take on whole-life? 'You're paying to be served a plate of garbage that if you eat, you'll have financial poisoning.'
First, the sales commissions are the highest among insurance products. Around 150 per cent of a year's premium goes to your adviser, she said, though her figures are based on her US experience.
Second, guaranteed cash values are low and even then, you usually do not break even on your premiums until the 18th year, she claimed - so any customer who wants to cash out halfway will emerge with not only an exit penalty, but also a loss.
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