Contributed by Michelle Ee, Wealth Management Director, Financial Alliance Pte Ltd
(The contributor can be contacted at firstname.lastname@example.org)
If you are over age 40 and own a few life insurance policies, I am sure at least one of them is a whole life plan. Will you buy more whole life plans?
What if you are a young adult? Will a whole life plan be relevant to you? Before you jump to the conclusion that it isn’t, allow me to lead you through the evolution of the whole life plan in the last 2 decades. You’d be surprised to learn that a whole life plan today may look nothing like one that was purchased 25 years ago.
Let’s look at what was available back then. To avoid confusion, I shall call the whole life plan that was available more than 20 years ago the “conventional whole life plan”.
The Conventional Whole Life Plan
It has the following common features:
- Insured events are Death and Total and Permanent Disability (“TPD”) until age 60/65.
- Premium is payable up to age 80/85/99 or lifetime;
- The policy starts accumulating cash value (surrender value) from the 3rd policy year onward;
- Advanced stage critical illness (“CI”) coverage may be included in the main plan or as a supplementary benefit (which may or may not cover a lifetime);
- Part of the premium goes into a life fund which the insurance company has the responsibility to manage and make investments with. The returns from the investments are shared with policyholders via distribution of annual/reversionary bonuses. For policies which have stayed in force up to some stipulated policy years, there are also terminal bonuses which are payable when the policy is terminated due to a claim or surrender; terminal bonuses are paid on top of annual/reversionary bonuses;
- Ways to tap on the cash value accumulated in such a plan include taking a policy loan against the accumulated cash value, reducing the sum assured, withdrawing the accumulated annual/reversionary bonus in cash (however the cash amount is only a small fraction of the accumulated bonuses) or surrendering (terminating) the policy
While such a conventional whole life plan has served many policyholders well in terms of protection and savings, some people hold negative views about it, which include:
- The long term premium payment commitment becomes a burden, especially after one retires;
- The policyholder is not rewarded for buying and keeping the policy in force, it only benefits the beneficiary; and
- The premium is much higher than a term plan with the same sum assured, which can also provide financial protection in the event of death, TPD or CI.
The good news is, things have changed – the whole life plan has kept up with the times. Let’s look at 5 features that have made the whole life plan evolve over the last 20 years.
#1: Limited-payment Whole Life Plan – Lifetime Coverage with Limited Period of Premium Obligation
Around 2002 or thereabouts, insurers such as AVIVA & Asia Life (now known as TM Life) began to offer whole life plans with limited premium payment terms of 10, 15, 20 or 25 years. This change was much welcomed by consumers as it removes the concern of having to pay premiums until age 80/85/99. Soon, all other insurers followed and nowadays, the limited-payment whole life plan has become the norm.
#2: Limited-payment Whole Life Plan with Minimum Protection Benefit – Embed a Term Plan in a Whole Life Plan
Sometime around 2011, insurers began to offer whole life plans with a minimum protection benefit (“MPB”) equal to X times of the basic sum assured until the life insured is aged 65/70/75/80. The factor that is applied to the basic sum assured to derive the MPB ranges from 2 to 9 times. That means one who buys a basic sum assured of $100,000 is able to get a minimum protection benefit of up to $900,000!
This is yet another milestone for the whole life plan as it now has a term plan embedded in it. In a way, consumers can enjoy the best of both worlds. He gets the benefits of a whole life plan, such as not having to worry about premium payment after the premium payment term is fulfilled, and still have an open contract with the insurer to get perpetual coverage until he decides to stop. Moreover, after the policy has accumulated cash value, he is able to keep the policy intact via non-forfeiture provisions (i.e., automatic premium loans) even if he forgets to pay premiums occasionally. At the same time, he is able to get his desired amount of coverage by applying the right amount of MPB.
The trade-off for high MPB is low cash value. This change in the limited-payment whole life plan reflects a new consumer mentality, that is, the limited-payment whole life plan with MPB is an instrument for financial protection, but not an investment or savings plan. The cash value in such a policy serves as a reserve fund to sustain the policy due to occasional inability to fulfill premium payments or as a partial premium refund when the policy is surrendered.
#3: Limited-pay Whole Life Plan with MPB & Enhanced Critical Illness Coverage – All Rounded Protection Plan
With the strong financial protection purpose in mind, insurers also began to offer supplementary riders attachable to a whole life plan for comprehensive coverage for critical illnesses (“CIs”). Such a rider pays its benefits should the life insured be diagnosed with a CI at early, intermediate or advanced stages. Some insurers also offer CI coverage which can be restored after a claim so that the life insured does not lose CI coverage totally.
The payout for CI cover is more than just to make up for income loss. It is also meant to cover treatment cost which is not covered by hospitalisation insurance, such as costs incurred to seek TCM treatment, alternative treatment or treatment overseas. Therefore, the need for CI coverage does not necessarily become redundant when one is no longer earning income. On the contrary, we are likely need it more as we grow older, hence having a lifetime coverage for CI provides peace of mind.
What About the Term Plan?
There are some who feel that a term plan serves the same purpose as a whole life plan at a much lower cost, hence it makes more sense to use a term plan for protection and invest the difference in premium to get better investment returns. This approach is not wrong, but it only works for an individual with the following traits and circumstances:
- Accurately sure about the period that coverage is required;
- Savvy and disciplined enough to invest the amount of premiums saved, which may be a couple of hundred to a few thousand dollars a year; and
- Conscientiously keep up with every premium payment due even during old age, as a lapse in just one premium payment due can mean the loss of coverage forever.
The term plan and the whole life plan have co-existed for decades, each serving different purposes. Hence it is not whether which is more superior but rather, which is more viable (to serve the individual’s financial objectives) and more suitable (taking into consideration the individual’s circumstances and level of financial literacy).
While this article is not about the term plan, I would like to highlight as a side note that product evolution is not restricted to the whole life plan. One insurer recently launched a term plan which includes features such as a limited payment period, the cash value becoming available after a certain number of policy years and even a maturity benefit equivalent to the sum assured at age 99!
When it comes to buying insurance, especially one with a long policy term, making sure that the policy is intact when the claim arises and leaving a legacy for loved ones tend to be in the picture. The features of a whole life plan provide more peace of mind in this aspect when compared to a term plan. That is probably the reason why insurers are beginning to add some features of a whole life plan to a term plan.
#4: Limited-pay Whole Life Plan with Cash Payout – Whole Life Plan No Longer for Beneficiaries Only
One of the negative views about the whole life plan is that it only benefits the beneficiaries. This is no longer true since around 10 years ago with the appearance of the whole life plan that pays out cash coupons after certain policy years up to a lifetime. With so many Baby Boomers and Gen X retiring or near retirement, such a product is now very popular as an instrument to create retirement income to complement CPF Life.
Such a policy can behave like an annuity from which a policyholder can draw down the cash value/death benefit to receive a higher income. However, If the life insured lives a long life, there will be no death benefit for the beneficiary. If policyholder would like to make sure he leaves behind his savings for his loved ones, he can choose to receive a lower income so that, upon his demise, the death benefit (usually slightly higher than the total premiums paid) will be paid to the beneficiaries. Some insurers pay out additional income should the life insured suffer a disability.
#5: Single-pay (SP) Whole Life Plan – Wealth Preservation Instrument
As our society becomes more affluent, more consumers are looking for financial instruments to deposit or invest their spare cash. SP Whole Life Plan is a popular product for risk averse or non-investment savvy individuals. Having said that, investment-savvy high net worth individuals also use such a financial instrument as a form of diversification strategy to spread their wealth into different baskets with varying levels of risk exposure for legacy planning purpose. A SP whole life plan comes with the choice of high coverage or lifetime income payout for different financial planning purposes.
Because of these interesting developments (with potentially more to come) in whole life plans and the vast variety of choices among them, I am confident that the whole life plan will remain relevant for financial planning purposes, be it for financial protection, income creation or wealth preservation depending on your current life stage.
Important: The information and opinions in this article are for general information purposes only. They should not be relied on as professional financial advice. Readers should seek independent financial advice that is customised to their specific financial objectives, situations & needs.