22 Sep 2021
I was introduced to a whole life policy that I have to pay over 25 years for a whole life coverage of $200k up till the age of 70 and $100k after that.
It includes whole life early Critical illness (CI) and Total Permanent Disability (TPD) as well.
At the end of 25 years, I would have paid about $86k in total for the premium.
Before this, I have gotten some advice on if I should buy term policy instead of the whole life policy and invest the rest.
I currently do invest/DCA in ETFs (SPY, VOO, etc) and a few selective stocks myself.
I understand the idea is that term policy costs lesser and the yields I get from investing the savings from buying a term policy will eventually be higher than the payout of a whole life policy. While I agree with this, there one thing I couldn't quite understand it.
So, in my case, the advice I'm getting is despite that the whole life policy still has a value of at least $100k in addition to some bonuses at the end of it (after 70yo), the returns I will get from investing the same amount of money I paid for the premium into an ETF after 70yo will still be more than the final value of the policy.
But during the time before 70yo when the returns of my ETF haven't even get close to anything significant, the whole life policy still pays out $200k, doesn't it? The same amount I would have paid for the premium invested into ETF may not have yielded over $100k yet before 70yo, let alone $200k, if anything touch wood were to happen before 70yo. I would also think the period before 70yo needs that coverage most. And once I'm after 70yo, indeed, the value of the whole life policy drops to $100k (plus a little bit of bonus) and perhaps the value of my ETF now is finally close to $100k. If I'm lucky, my ETFs may worth $150k (which is still lesser than $200k). But I'm already 70yo at this time.
What I'm confused is, then, wouldn’t it be more worth it to buy a whole life policy that cost $86k in total premiums over 25 yrs that (1) will allow me to hedge my risk at a higher payout ($200k) than I could get from investing before 70yo, and (2) I'm guaranteed to eventually recover all the premium I have paid ($100k) in addition to some bonus to my beneficiaries at the time of my passing? Doesn't this sound like it's better to buy whole life policies then? Am I missing something about the the buy term invest the rest idea?
While I don't know your age or the configuration of the plan you were proposed, the idea of BTIR is really only cost effective when you are talking about pure death/TPD coverage.
When it comes to term + early CI vs whole life with multiplier and early CI, the numbers almost always tilt in favour of whole life (again, depending on your situation). Furthermore, the benefit of having lifetime CI coverage is somegthing that should not be neglected. A payout at the age of 80 means you don't have to tap on your retirement savings and assets first, buying you time to figure things out.
If you look at a term + early CI with rider, the rider is almost certainly the bulk of the cost. Term itself, for death/TPD, is very cheap and it really doesn't make sense to do WL for death/TPD since liabilties and dependents should not exist after 70. Whereas a WL with early CI rider, the bulk of the cost is actually on the WL itself. That is why BTIR makes sense if you are not considering CI (especially early CI). Once you throw early CI in, the equation changes. And not forgetting that if you finally decide you don't want your WL at the age of 70, you'll likely get your premiums back in full by then.
Not forgetting that for your ETFs to reach $100K by 70, you need to 1) commit to investing the difference (which many don't) and 2) make returns off the market (you should be able to do it, but some people end up losing money instead). After 70, you'll also have to deal with market volatility. If you were diagnosed with cancer at 75 in the midst of a 50% market crash, your $100K - $150K ETF portfolio would be cut in half, but a WL still pays out that $100K plus bonus. You'll have to deal with managing your investment portfolio while you are retired, vs letting the insurer grow it (abeit conservatively) through the par fund. Personally, I prefer to just enjoy my retirement without too much worry.
If you dont believe in CI cover after 70, then just buy term. The 'invest the rest' portion shouldn't even be for the purpose of having a pool of liquidity in the event of CI after age 70 since you didn't believe in CI cover after 70 in the first place! Don't use investments to replace insurance's purpose. Segregate the two accordingly and then make the right decisions for yourself.
I feel like I've been going in circles, but I'll just end off with three more things:
1) Consider a 20 year payment term since the increase in yearly premiums is not that high, but your total paid will be quite a fair bit lesser (unless affordability is in doubt). Not sure why your advisor did not recommend that...?
2) You may want to look at a higher multiplier e.g. x3 since you are young. 200K CI cover seems enough now, but you might want to get more in future and we simply don't know how your health will be like then. So plan ahead, especially if you think you'll be getting married or getting a house in the near future. It will always be cheaper to lock in now than later, health conditions aside. A higher multiplier also ties in with what you mentioned about needing more coverage before 70. In fact, a WL with multiplier is basically a term plan stacked on top of a traditional WL plan.
3) Look at all your options across the board. Multiple insurers offer WL with multiplier plans and you will want to know about all your options before you commit.
I can't give any advice here, but suffice to say this debate has always been raging on and on. No side is truly right or wrong but I have my reasons for my views, and I am sure the BTIR camp has theirs too. Let's stay respectful, but open to the differing viewpoints. And in the end, you have to choose what you need for yourself. The choice is always yours.
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