Sunday 26 July 2015

The Cost of Buying Insurance at a Later Age

You have probably heard that it is better to buy insurance at a young age, as the insurance premiums will go up while health conditions will go down with age. However, how costly is it to put off buying insurance until an older age? Previously, you need to have an insurance agent friend to know this. However, with, we can now know the cost of putting off buying insurance until an older age.

The chart below shows the annual premiums (blue) and total premiums (red) for a level term insurance with critical illness benefits for a non-smoking male with a sum assured of $1 million covering until 70 years old. Using age 25 as an example, the annual premium is $3,150, payable for 45 years until age 70. The total premiums payable would be $141,700. If this person were to put off buying insurance for 5 years until he is 30 years old, the annual premium would go up to $4,280, payable for 40 years until age 70. The total premiums payable would be $171,400. Do note that the insurance product used for analysis is not the cheapest term insurance product available on compareFIRST. This product was chosen as it has the widest age coverage. Hence, the proper way to read this blog post is to understand the relative differences in premiums rather than to take the premiums as absolute numbers. Moreover, the terms of the insurance (i.e. type of product, age of coverage, sum assured, etc.) assumed in this analysis might not be what you need.

Variation of Insurance Premiums with Starting Age

As shown in the figure above, the annual premiums will increase with age. The increase will start slowly, but will accelerate at the age of 30. The average increase in annual premium is approximately 29% for each 5-year increase in age between age 20 and 65. On an annual basis, the increase in annual premium works out to be approximately 6%. 

The total premiums payable over the policy duration will also increase with age. Like the annual premium, the increase in total premiums will start slowly, but will accelerate at age 30. The total premiums will reach a peak at age 55 before falling off, due to the shorter policy duration. It is interesting to note that until the age of 25, the total premiums do not increase by a lot, but you get to enjoy a longer coverage (the premiums above are for an insurance policy covering until age 70, regardless of the starting age of coverage).

There are 2 key reasons why total premiums will increase with age. Firstly, as a person ages, his health also deteriorates, thus increasing the risk to the insurer. Secondly, with a shorter policy duration, less time is available for the insurer to invest the premiums to generate the insurance payouts.

In conclusion, it is true that it is better to buy insurance at a young age. Based on the above analysis, the ideal age to buy insurance seems to be before the age of 25. If you have not bought any insurance, it is perhaps a good time to ponder over it. Notwithstanding the above, it is important to note that age is not the only factor in deciding the purchase of insurance. There are many more important factors, such as whether you have set up a family, have children, bought a house, etc. There are other insurance products such as whole-life, reducing term and endowment insurance available on which might be more suitable for you. You can vary some of the parameters and see which insurance is best suited for you.

By the way, when you meet your insurance agent, please let him/ her know that you found out about it on compareFIRST, so that insurers can place more of their insurance products on it for comparison.

Sunday 19 July 2015

The Ideal Insurance Payouts

Last week, I blogged about a term insurance that pays out benefits monthly instead of a lump sum. The benefits of such a regular-payout insurance are discussed there, but I will explore further one of the benefits mentioned which is to safeguard the beneficiaries from unwittingly investing the lump sum payout into some risky investments to stretch the duration which the money could last. When the family suddenly receives a large sum of money from insurance, it is also possible that they might be surrounded by friends and relatives who will have no lack of ideas on how to stretch the money. Considering the typical family in which the spouse might not be financially savvy, the parents are old and the children are young, they might not be able to reject risky suggestions. Hence, from this perspective, even a person who has saved enough money and do not actually need insurance could do with a regular-payout insurance, if his family members are not financially savvy to manage the wealth that he will leave behind. A regular-payout insurance provides greater assurance of the amount of money that could be spent monthly as well as how long the money could last. Having said that, this is not the only way of achieving this. The other way is to set up an irrevocable trust that pays out a pre-determined sum of money to the beneficiaries regularly, but I have not set up one and hence not familiar with it.

While a regular-payout insurance has merits, there is an undesirable side effect, which is the beneficiaries will be constantly reminded of the passing of the policy-holder with the monthly receipt of the payout. One suggestion to improve this is to use a "charitable" foundation to pay out the money instead of the insurer. The foundation could provide a disguise for the payouts by claiming that the policy-holder has been a good person helping others in need and hence the foundation is willing to support the family through monthly payouts for a fixed number of years. Only with the last payout would it be finally revealed that the regular payouts are not charitable payouts but a result of the policy-holder's foresight to provide for his family long after his passing.

There is also a need to disguise the insurance policy in case the family finds it and files a claim with the insurer, only to be told that it is a regular-payout insurance policy. The disguise would be to add on a small lump sum payout so that the family would go away thinking it is a traditional lump sum payout insurance policy. The small lump sum payout has financial benefits as well, which helps to pay for unexpected immediate expenses. You can refer to Preference for Regular Payout Insurance for some of the cases in which a lump sum payout is useful.

With all these disguises, the family is probably not aware of the existence of this regular-payout insurance policy. Hence, there is a need to ensure that the insurer will live up fully to its commitment to pay out the benefits for the agreed period. This is where the independent "charitable" foundation could play a role. The insurance policy could include the foundation as a nominal beneficiary of the policy and the foundation could monitor to ensure that the insurer fulfils its commitment.

This is what I think will make the ideal insurance. It will probably cost a bit more, with the inclusion of the independent "charitable" foudation. However, I think it will be worth the cost. I hope insurers will take up the challenge!

See related blog posts:

Sunday 12 July 2015

There is Really a Regular-Payout Term Insurance

About 2 years ago, I wrote a post on my Preference for Regular Payout Insurance. The reasons for this preference are discussed in that post, but I will further illustrate the reasons below again. At that time, I thought that such insurance policies only exist for disability income. For more traditional insurance policies covering death and critical illness, there was none. Recently it turns out that some insurer has heed the call and came up with an insurance policy covering death, terminal illness, total and permanent disability, and critical illness that pays out a regular sum each month. The insurance policy is MyFamilyCover (MFC) from Aviva. Thanks to comments from a reader, E H, on My Considerations on Eldershield, I chanced upon it on, the official website set up by Consumers Association of Singapore, Monetary Authority of Singapore, Life Insurance Association Singapore and MoneySENSE to assist consumers to compare and find life insurance products most suited to their needs.

How MFC works is that you choose how much is the monthly benefit payout and the policy duration. Upon the occurrence of an unfortunate event, the policy will pay the monthly benefit for the remaining duration of the policy or 10 years, whichever is longer. An illustration of how it works is shown below.

How MyFamilyCover Works

In the example above, John enters into a policy that pays $3,000 per month for a duration of 30 years at age 35. At age 45, he is diagnosed with a critical illness. The policy will pay out $3,000 per month for the remaining duration of 20 years to him or his family. This helps the family to meet the daily expenses until say, the children have grown up and are able to earn an income to support the family.

There are 4 different flavours of the policy, as follows:
  • Plan 1 - Covers Death, Terminal Illness (TI), Total & Permanent Disability (TPD) and Critical Illness (CI)
  • Plan 2 - Covers Death, TI and TPD
  • Plan 3 - Covers Death and TI
  • Plan 4 - Covers TPD and CI
The policy that I bought is Plan 4. However, for ease of comparison with other traditional insurance policies, I will assume Plan 1 in the subsequent discussion.

As the total amount of payout reduces with time, it is quite similar to a reducing term insurance whose sum assured reduces with time, like the loan principal of a mortage loan. How does MFC compare with a reducing term insurance? The following assumptions are used:

Monthly Cover  $         3,000
No. of Years 30

Reducing Term Insurance
Total Cover  $  1,000,000
No. of Years 30
Interest Rate 5.0%

The reduction in total payout for both MFC and Reducing Term is shown below.

Total Payout for MFC and Reducing Term Insurance Over Time

As shown in the figure above, the total payout for MFC drops faster than Reducing Term as Reducing Term has an interest rate of 5%. The difference reaches $145,000 by Year 18, after which the difference reduces over time. As MFC has a minimum payout duration of 10 years, the total payout remains constant at $360,000 from Year 20 onwards while that for Reducing Term continues to drop. From Year 24 onwards, the sum assured for MFC is higher than that for Reducing Term.

Why did I choose MFC over a more traditional Reducing Term insurance, even though Reducing Term has a higher payout than MFC for most of the policy duration? The key reason is because MFC pays out the benefits regularly whereas Reducing Term pays out the benefits in a lump sum, even though the lump sum may be higher. While the lump sum payout guarantees the amount of payout received, it does not guarantee how much money could be spent monthly to meet daily expenses or how long the money could last. In contrast, for MFC, both the amount that could be spent monthly and how long the money could last are known. Considering a typical family in which the spouse might not be financially savvy, the parents are old and the children are young, a known regular payout for a known duration provides much greater assurance to the family than a known lump sum payout but unknown draw-down amount and unknown duration. Not everyone is financially savvy to be able to manage a lump sum payout. If the family unwittingly invests the lump sum payout into some risky investments in their attempt to stretch the duration which the money could last, it could put the financial sustainability of the family at risk. For the above reason, I have always preferred a regular payout insurance over a lump sum payout insurance. It is good that Aviva has understood the need and came up with an innovative insurance policy that addresses the needs more precisely. I hope more insurers would do the same.

There is currently a 20% discount on all future premiums on MFC. The promotion will end on 31 Jul. So, if you are interested, do hurry. You can contact Aviva on their website (give 2 days for them to call you back). Alternatively, I can refer you to the insurance agent whom I bought MFC from by leaving your contact info here. In the meanwhile, you can check the MFC brochure on Aviva website and the annual premiums on

By the way, when you meet the insurance agent, please let them know that you found out about MFC on compareFIRST, so that insurers can place more of their insurance products on it for comparison.

See related blog posts:

Sunday 5 July 2015

Stretch Loan & Invest the Rest

You probably have heard of the phrase "buy term and invest the rest". It means to buy a term insurance instead of a whole life insurance and use the savings in insurance premiums for investment. Can this advice be applied to loans as well? Meaning, instead of paying off your loan over a short period of time, you stretch your loan over a longer period and use the reduction in loan repayments for investment.

Let us consider the following scenarios:

Loan Principal
Loan Interest Rate 2.60%
Loan Tenure (Short) 15 years
Loan Tenure (Long) 30 years
Yearly payment (Short)
 $  32,545
Yearly payment (Long)
 $  19,367

Yearly Available Sum
 $  32,545
Yearly Rate of Return 7.00%

The loan principal is $400,000. You have a sum of $32,545 yearly which can be used to either service the loan or invest in a portfolio of stocks and bonds. The loan interest rate is 2.6% while a balanced portfolio of 50% stocks and 50% bonds can return 7.0% each year on average. You can choose a short loan tenure of 15 years, in which you will pay off the loan in 15 years, after which you can channel all the money to investment for the next 15 years. Alternatively, you can choose a long loan tenure of 30 years, in which you channel $19,367 to service the loan and the remaining $13,178 to investment every year for 30 years. Which option would be better for you? The figure below shows the loan and investment amount for the 2 options.

Loan & Investment Amount for 2 Loan Tenures

As discussed earlier, the shorter loan gets paid off earlier by Year 15, whereas the longer loan is only paid off after Year 30. However, the investment amount only grows to $818,000 at Year 30 for the shorter loan option, compared to $1.24 million for the longer loan option. In terms of the total loan interest payable, the shorter loan incurs a smaller interest of $88,000 whereas the longer loan incurs a larger interest of $181,000, which is nearly $100,000 more than the shorter loan. This means that there is nearly $100,000 less available for investment. Yet, due to the longer period of compounding, the longer loan option is able to generate $849,000 in investment gains, as compared to $330,000 for the shorter loan option. This example shows that the time period available for the investment to compound can be more important than the amount of money available for investment.

From another perspective, the servicing of loan can be considered a form of investment. The "return" from this "investment" is the loan interest rate, which at 2.6% is lower than the 7.0% return available from the balanced portfolio of stocks and bonds. Hence, it is more beneficial to channel most of the money to the investment with higher returns, which is the balanced portfolio. Conversely, if the rate of return from the balanced portfolio is lower than the loan interest rate, then it is better to channel most of the money to pay off the loan as soon as possible. In essence, loans and investments are 2 sides of the same coin and should be assessed in the same manner.