I threw away SGD 10,000 by canceling my Whole Life insurance and it was completely worth it (Updated)

[Updated 24-March-2019]: This post was extensively updated – after some great feedback – to include detailed calculations to help illustrate the thought process behind the cost-benefit analysis. The cost-benefit analysis done in the original post did not showcase the nuances involved in a decision of this nature and I wanted to make sure my posts are of high quality. This is a complex topic and I think I needed to provide all the detailed discussions that’s presented here to show my thought process fully. So I hope you enjoy the details that I’ve added and let me know if you have any questions or further feedback!

Disclaimer: This post is about Whole Life and Term Life Insurance policy and its merits to my personal situation. I am not a professional in the insurance industry and this post should not be taken as financial advice. Your situation will be different and you should consult a qualified professional to assess your specific case before making any decision regarding your own insurance policy.

Me: “Hey, Susan*, how much am I paying for my Whole Life Insurance per year?”

Agent: “Hey, FPL! Hmmm… let’s see. You’re paying S$4,400 a year.”

Me: “I see… How much did you say the a similar Term Life plan costs for me?”

Agent: “The one I sent would be about S$1,800 a year. But that only covers you till you’re 60.”

Me: “OK, great, I’d like to cancel my Whole Life plan and get that one instead.”

Agent: “Are you sure? You’ve already paid for 3 years and you’ll only get back S$3,200 in residue value. That’s a loss of S$10,000 and you’re on your own after you turn 60 ok?”

Me: “I’ll take it.”

Agent: “Alright… if you wish, you can come in and sign the paperwork tomorrow.”

*Not actual name.

That was how it – pretty much – went down last week when I realize that the annual payment for my Whole Life insurance was becoming due in June. I had to make a choice on whether I want to continue making the steep S$4,400 per year payment for a lifetime worth of protection.

After considering my options and my FIRE plan of being retired in my 40s, I decided that the Whole Life plan I had was not worth it for me. It was simply not a good fit for my life plans and personal situation. Why, then, was I paying so much money for it?

Here’s why – despite throwing away S$10,000 that I will never get back – I felt it was still worth it to cancel the insurance plan and instead went with a Term Life insurance plan.

Why do you need Life Insurance?

Before we even get into the details of my Whole Life vs Term Life debate, let’s first examine the purpose of Life Insurance, why you need it and when do you need it.

In Singapore, there are always 3 parts to Life Insurance:

1. Death & Accidental Death: Pays out when you die.
2. Dreaded Disease (DD) and Critical Illness (CI): Pays out when you have something that has a high chance of killing you soon. Does not cover early stage of diseases.
3. Total & Permanent Disability (TPD): Pays out when you become disabled in such a way that you’re no longer independent and likely must be taken cared of for the rest of your life.

Those 3 parts play two important roles:

Protecting your dependents & loved ones

Arguably the primary purpose of Life Insurance is to take care of your loved ones. If you are a breadwinner, the insurance benefit is there to make sure that the insurance can help cover their living expenses when you pass away or become disabled.

Protecting you

If you do not pass away then there’s a high chance that they will also have to spend money to support you so it should cover both their cost of living as well as the cost of taking care of you.

Even if you do not have dependents relying on your income or your support, when you become disabled, you will want to make sure you have enough income to hire help or caretaker to make sure that your standard of living remains acceptable and not become a burden to your family.

So that’s it, two things that Life Insurance should do. Here’s what it should NOT be used for:

Investment or Retirement Fund

The purpose of insurance is to protect against risks, not as a means to grow wealth. So when you are looking at insurance, stay away from any Investment-Linked Policies. Let insurance be insurance and investments be investments. By purchasing insurance that has an investment component, you’re paying more for less. It’s not worth it.

You must also remember that this is not meant to pay for big lump sum costs like surgery and hospitalisation. That should be covered by a hospitalisation insurance – which you should certainly have.

How much life insurance do you need?

So now that I’ve established that Life Insurance is there to protect my loved ones and myself if something were to happen to me, we come to the part where I assess the amount of protection I would need.

Note: The industry standard for the amount of coverage you need for Life Insurance and CI is to multiply your annual income by 5. That is the rule of thumb, but I’d like to maybe dig a little deeper and take a look at it from a perspective of a person on the path to FIRE.

As I’ve already established above, the ideal life insurance should cover 2 things:

1. Cost of living (COL) of my dependents.
2. My own COL if I become disabled or critically ill.

The payout of the life insurance should be just enough to cover those two items, no more and no less.

In order to understand how much insurance benefit I require, I can assume that the insurance payout will come in one lump sum. When I receive that lump sum – since it’s a large amount of money – I won’t be leaving that in cash to rot away under inflation, I know better than that.

So instead I will assume that I will put the majority of it into a Bogleheads style investment portfolio so that I can withdraw a steady 4% from it indefinitely to support my cost of living.

This gives us a familiar formula – in order for the insurance payout to generate enough passive income to support living expenses, we can represent the calculation like this:

Insurance Payout = (Dependents COL + My COL) / 4%

But hang on! As a person trying to achieve FIRE, I am also building my retirement nest egg that should be growing and could be drawn from at 4% per year if something were to happen to me. Which means we should be factoring that into our calculation as well.

So now the formula actually looks like this:

Insurance Payout + Current Portfolio Value = (Dependents COL + My COL) / 4%

Let’s move things around so we can figure out the amount of insurance payout I really need.

Insurance Payout = ((Dependents COL + My COL) / 4%) – Current Portfolio Value

Great, now we have a pretty simple and clean formula for us to calculate with.

Let’s do a sample calculation using my current situation

Dependents COL: Luckily my wife currently works and fully supports herself and we have no children. However, I am sending money home to support my parents at S$1,000 per month. So I will assume a total of S$1,000 here, which is S$12,000 per year.

My own COL: In case I am disabled and can’t take care of myself properly, I don’t want my wife, children or parents to have to support me on their own. This means I need to make sure that there’s enough passive income to cover hiring a caretaker and pay for any food or medication I may need in the long term.

This is really hard to estimate and really depends on what level of disability we are talking about. How long I will remain alive in that state is also a factor – if I have stage 4 cancer, I might only need support for a 3-4 years before I pass, but if I lose both my legs I’ll probably be alive until I die of old age but the level of care will be different. So to be safe, I will estimate another S$3,000 here. Another S$36,000 per year.

Current Portfolio Value: My current investment is currently around S$140,000 and if I stop working today due to some illness, I can withdraw 4% from this amount each year to help support my COL. So that’s what I’ll use for this calculation.

Here’s what the formula looks like after it’s all filled in:

Insurance Payout = ((S$12,000 + S$36,000) / 4%) – S$140,000

After calculating everything, here’s the amount that will be needed:

Insurance Payout = S$1,200,000 – S$140,000

Insurance Payout = S$1,060,000

So based on my current situation and my current investment portfolio, S$1,060,000 in insurance coverage should be what I am shooting for.

You will also notice that because the current investment portfolio value factors into this equation, as my portfolio value grows, the less Life Insurance I actually need! Very handy because my investment portfolio can be used to generate the income that’s needed to support my dependents and myself.

We can also draw a conclusion here that if you’ve achieved FIRE and your FIRE number is higher than the Life Insurance payout, you will no longer need Life Insurance once you’re FIRE’d. Makes sense no?

Know Your Risk Disclaimer: By following this calculation, the risk rests on the Cost of Living (COL) estimation. If I underestimated my dependents COL as well as my own COL, then my coverage could be too low. My long-term medical costs could be higher than expected. If I want to give myself a buffer, I can increase the COL number or lower the Safe Withdrawal Rate from 4% to a more conservative 3.33% so that I have a bigger monthly withdrawal to support myself and my dependents with. In my case, my FIRE number is actually S$2.1 million which calculates up to S$6,000 per month at 3.33% withdrawal rate. If I achieve that before the age of 40, I think that’s plenty to cover the cost of living for myself and my family even if I become ill after retirement.

OK, so now that we are armed with this knowledge, let’s take a look at the insurance that I actually had.

What insurance did you have?

When I purchased my Whole Life insurance plan 3 years ago, I didn’t really think about it as deeply as I have detailed out above.

I only knew that I should have a life insurance to protect my loved ones and myself when I become disabled, but I have no clue about how to calculate how much I actually need.

So like many, I simply listened to what my financial advisor recommended and since I didn’t have the same goal to retire early back then, the recommendation did not account for that.

Let’s take a look at what I bought:

You’ll notice several deficiencies with this Whole Life insurance plan:

1. The insurance coverage is not nearly enough. Based on my calculation above, I should be getting around S$1,000,000 in coverage, not just S$490,000.
2. It is a Whole Life plan that charges a higher premium – paid till age 55 – in order to continue coverage for life. However, once I reach my FIRE number – hopefully around age 40 – I won’t require the life-time protection of the Whole Life policy. This benefit of a Whole Life plan isn’t as relevant for my situation.
3. It has a surrender value which includes a “Participating Funds” component which provides a “bonus” based on the fund’s performance – which are not guaranteed. The premiums paid are used to participate in a fund which generates a return and thus is one of the reasons for why the premium is so high. As a person who is knowledgeable about investing and is confident about generating a higher return than the insurance’s participating fund, I will be better off investing the money myself.

So all in all, this is a plan that is a horrible fit for me and my future plans. So I let my financial advisor know of my change of plans and – props to her – she immediately helped look into another insurance plan that fits better.

What does the alternative plan look like?

After discussing my situation and what I’m thinking, here’s what the new plan looks like:

Right away you can see the big improvement in product fit:

1. The insurance payout more closely matches my needs.
2. Much lower premium as it is a Term Life plan without any residue value and covers only until age 60 if I continue to pay the annual premium.
3. Has no surrender value and no participating funds component. I will be using the savings from the premium to invest myself and accelerate my FIRE progress.

With this plan, I will be saving S$2,600 per year and get more coverage during the length of the term. I can also choose to discontinue the plan whenever I need to without worrying about reduced surrender value due to early termination.

For the Whole Life plan, the majority of the payments during the first few years of the plan goes to pay the distribution cost and insurance premium instead of towards growing the bonus portion. If I terminate early, the surrender value will be low – that’s why after paying S$13,200 over 3 years, I will only get back S$3,200 after cancelation.

In the case of a Term Plan, I don’t have to worry about that.

[Updated: 24-Mar-2019] The following sections has been updated with more details and cost-benefit analysis since the article was first published.

How do they compare monetarily?

It’s very difficult to do a direct cost-benefits analysis between the 2 plans as there are some differences in features but we can hold several things constant in order to compare them.

Let’s first do a simple comparison

Before doing anything fancy, let’s take a look at the total premium paid:

You can already see on a total premium basis, Term Life is only half the cost and the coverage is double.

Now let’s take a look at the funds that we could use to invest. Assuming that any money left over from the premium goes to investment:

Since with Term Life, I can invest the difference for a longer period, there is more liquid cash being invested and for much longer. This fund can be used to support me after the Term Life plan ends, but because it is liquid and not locked up in an insurance policy, I have more flexibility with it.

Although, to really compare these 2 plans, another way to look at it in detail is to compare them based on what I’d call the total value over time. Which is the sum of the insurance benefits and the value of the investment portfolio over time, to see which plan is more superior, at which point in time, and what are the residue risk.

Let’s take a look at that in detail.

Comparing the two plans on the total value

Here are some assumptions going into the comparison:

1. We have S$4,400 per year to pay for insurance premium. Any remaining amounts will be invested in a Bogleheads-style lazy portfolio.
2. The Whole Life premium payment ends when I turn 55 so I’ll divert the premium to investments until I turn 60.
3. The Term Life insurance premium is paid till 60 but it only costs S$1,800 so I’ll be diverting S$2,600 each year to investments till 60.
4. I will hold the Whole Life participating fund’s returns fixed at 4.75% p.a. – the rate used as one of the illustration in my insurance agreement – throughout the life of the policy. This is quite high. Par fund performance actually averages 3-4% depending on the company so I’m giving the par fund an advantage here.
5. For the rate of return on investments, I will do 3 simulations based on these rate of returns: 4.75% as a control against the Whole Life par fund, 6% and 8%.
6. Total value for each plan will equal the Death Benefit + any investment portfolio value. If something were to happen to me, this is what each option will provide in insurance payout and the investment portfolio.
7. We will simulate the total value from age 30 all the way until 100 years old, a 40 year period.

Here’s what the setup looks like in table format:

First another disclaimer: When investing your own funds, the returns are never as smooth as what I’m showing here. It will be volatile and can go down significantly before going back up so the chart will be a jagged mess. However I am simulating using reasonable average returns which smooths out the charts. Keep this in mind.

So let’s take a look at our very first comparison.

Whole Life @ 4.75% and Term Life with Investment returns also @ 4.75%

Here’s what the total value looks like in a chart:

Well, that looks pretty bad for the Term Life plan. 🤔

Term Life looks great between age 30 and 61, where the Term Life still provides coverage of S$1 million and my investment continues to grow @ 4.75% p.a.

However, once Term Life coverage ends at age 61, the situation reverses. At that point, I am left to depend upon solely on the value of my investment portfolio, which only barely reached S$200,000 while Whole Life still covers me up to S$490,000 until age 69. That’s a difference of more than S$290,000 in value.

Then, even at age 70 when the Whole Life benefit drops from 350% of sum assured to using the 100% sum assured + 100% bonus, the total value is still more than S$150,000 higher than Term Life’s investment value.

Side Note: How does Whole Life insurance provide more bonus level than us investing our own funds you ask? Well you have to understand that by buying Term Life, that portion of the money is gone, S$1,800 (100%) of it is used to pay for the insurance and none goes to any investment. Whereas in the Whole Life plan, although you are paying S$4,400 in premium, a portion of that gets invested. So even though you are investing S$2,600 you saved by getting the Term Life plan, the Whole Life plan may actually investing S$3,000 per year and only charging you S$1,400 as premium per year, on average. The insurance company can afford to charge you lower pure premium, on average, in the Whole Life plan as they can actually front-load the premium payments early on to give them a better time-value of money advantage, that’s why if you cancel your Whole Life plan early, you barely get anything back. Most of it has gone to premiums up front.

Since the investment is assumed to grow at 4.75%, the same rate as the Whole Life’s participating fund, it will never catch up and remain worse than Whole Life for the duration of my life.

This is especially bad since your risk of death increases as you get older so the higher coverage in the early years should not be used to offset the lower coverage in the later years since it’s more likely that you’ll need it when you’re older rather than younger.

In this case, Whole Life is a clear winner.

However, 4.75% p.a. Is a pretty low investment return. If we are going to invest our own money, I sure hope that we can get much better than that. So what does it look like if we bump up the investment returns a bit?

Let’s bump up the investment returns to 6%

The situation here looks significantly different.

During the years between 30 to 61, the difference between this and the previous scenario isn’t that significant. Term Life clearly provides much better coverage here.

However at age 61, again, Term Life coverage ends and I am left to rely solely on the value of my investment portfolio. In this case – due to a higher rate of return – my investment grew to around S$250,000. Still not as high as the Whole Life’s S$490,000 coverage.

In this scenario, you can see that the Term Life option actually breaks even with the Whole Life plan at age 75. Why does investment portfolio in the Term Life option grow faster than the one in the Whole Life in this case? Well there are 2 reasons:

1. More funds are invested at 6% in the Term Life option (S$S250,000) than Whole Life option (S$20,000).
2. Whole Life plan is made up of 2 parts: 1) sum assured of S$140,000 which does not fluctuate or grow. 2) The bonus portion which is invested at 4.75%. So only that portion is providing any returns, plus the returns is lower than the self-invested funds.

This gives investment funds in the Term Life option an ability to catch up to the Whole Life value.

The major area of risk for the Term Life option in this case is the timeframe between age 61 and age 75, 14 years. If something serious happens here, the Term Life option won’t provide as much coverage as the Whole Life plan.

However, we’re already seeing a trend here. If we can invest our own funds at a higher return than the Whole Life participating fund, the gap between Term Life and Whole Life plan starts tilting in Term Life option’s favor.

So how does it look at 8% investment returns?

Last scenario: Whole Life @ 4.75% & Investment Returns @ 8% p.a.

Let’s take a look:

In this case, it’s starting to look ridiculous.

However, there is still a period of time where the Term Life option does not provide as much coverage as the Whole Life plan: between age 61 and 66.

The key learning here is that if you can get significantly higher investment returns than the Whole Life participating fund, the more you should select the Term Life plan.

So what kind of returns should we expect from the participating fund?

Expected returns of the Participating Fund

When looking at my Whole Life plan agreement, under “Investment Strategy” here is what it says:

When setting the investment strategy of the Life Participating Fund, we aim to balance between seeking an attractive return over the long run and taking an acceptable level of risk.

Based on the fund’s asset allocation, as of 2015, the strategy is quite conservative:

With this level of fixed income to equity ratio, it’s unlikely that it will produce higher average returns than even the CPF Special Account.

Based on feedback from insurance professionals, the average return from par funds is around 3-4% depending on the company so that makes sense.

Here are the returns that the fund reported in 2013 – 2015, which confirms this:

In those 3 years, the average return is 2.96%, nowhere near 4.75%. So if you can achieve an investment return of over 4-5% consistently, you will be able to outperform the Whole Life participating fund.

Personally I believe that I can definitely get way higher return that that.

Other important points to note

We didn’t take Accidental Death into account

The Whole Life insurance provides an additional 200% of the sum assured in the case of accidental death, which gives me a total of S$770,000 in payout until age 69. However, the Term Life plan pays out S$1 million for any death.

This means that if I happen to die from accidental death during the gap between age 61 and age 69, I will be much worse off if I went with the Term Life plan.

On the other hand, the risk of death by accident is the same no matter if I’m 31 or 71. So if I look at which plan provides better coverage for the longest time frame for accidental death, the Term Life plan comes out on top here for me.

Neither did we take Early Cancer Rider into account

Early cancer simply allows me to stop paying the Whole Life insurance premium if an early-stage cancer is detected. This is great if you happen to detect a cancer early, but this is very hard to predict so we didn’t account for it in our monetary calculations.

The Early Cancer Rider covers 5 types of cancers, which is quite narrow but the premium is very cheap (about S$50 a year):

1. Carcinoma-in-sity (CIS)
2. Early Prostate Cancer
3. Early thyroid cancer
4. Early bladder cancer
5. Early chronic lymphocytic leukemia

If I do have early cancer, then the Whole Life plan will be very worth it because I can stop paying premiums and direct all of the funds into investments instead. So if I’m purchasing the Whole Life insurance, it’s a no-brainer to also get an Early Cancer Rider.

How I chose between Whole Life or Term Life plan

Level of Coverage

As I calculated at the start of this post, I actually needed about a million dollars in coverage to really do the job of really covering my family’s living expenses and any personal living cost if I am disabled.

If I wanted to get that level of coverage from the Whole Life plan, the annual premium would have gone up significantly. I didn’t not ask my financial adviser how much it would have increased, but it would be significant and really change the cost-benefits analysis above.

In this case, personally I believe Term Life plan fits my needs much better from a cost-benefits perspective.

Investing & Confidence in Better Investment Returns

This is very important.

In order for the Term Life plan to make more sense than the Whole Life plan, I must meet 2 criteria:

1. I must invest the difference in the premiums.
2. I must be able to outperform the Life Participating Fund when investing.

I know a lot of people don’t want to be bothered to invest, don’t know how or are afraid of investing their own money, so they use the Whole Life plan as a sort of “forced saving scheme” and that’s fine. Stick with that.

If you went with the Term Life plan and don’t invest the difference (and just spends it all) then you should definitely stick with the Whole Life plan. Every. Single. Time.

Also if you don’t think you can beat the returns of the Life Participating Fund – not just match it, you must beat the returns by at least a percent of more – then you’re also better off by sticking to the Whole Life plan because it will always provide better coverage than my Term Life plan during my higher risk years.

However, since I will definitely invest my own money and I am confident that I will easily beat the returns of the Life Participating Fund, the Term Life plan is a better choice for me personally.

Accepting the Residual Risk

As I highlighted in the above cost-benefit analysis, there is a high possibility that the Term Life plan will provide a lower coverage than the Whole Life plan between the age of 61 to 75. The length of that gap really depends on the returns my investments will generate.

The higher the investment returns compared to the returns of the Life Participating Fund, the shorter and smaller the gap will be.

The range we showed above was 14 years for a return that is 1.25% more than the participating fund and 5 years for 3.25% more.

If I am going to abandon the Whole Life plan, I must fully understand that this is a risk that I must be willing to take.

If something happens to me during that gap, my family may have to make do with less than they need.

Then again, I am fairly confident – and I’ll try to steer my life in such a way – that I won’t need to support dependents at that point. My wife and kids should be completely independent. My parents won’t likely be alive. I’ll just have to worry about having enough money to support myself if I become disabled. This lowers the insurance coverage needs given that I have other sources of passive income – and CPF Life kicks in optionally at 65.

After understanding all of the risks above, I still feel that – given all the other benefits – Term Life plan still make a much better sense for me.

Hospitalization insurance to cushion the blows

Most importantly, I have a great hospitalization plan that covers all costs up to S$1,000,000 per each hospital stay – and 100 days before and 100 days after the stay.

As you guys know, my FIRE number will provide me with S$6,000 a month of passive income (already adjusted for inflation) so it should be able to handle any living expenses as well as any long-term medical and care-taking needs.

However, that’s predicated on a 3.33% withdrawal rate. If something happens that causes me to withdraw more than that from my portfolio, that could really compromise the sustainability of the portfolio. So the most important thing to ensure is that any large lump-sum medical cost does not come out of the portfolio.

This is where the Hospitalization Insurance comes in.

Mine covers any costs related to the hospitalization 100 days prior to the hospitalization and also up to 100 days after the hospitalization.

This plan will cover any of the large up-front and lump-sum costs which occur when I need medical attention:

1. Doctor fee
2. Surgery cost
3. Emergency room cost
4. Cost of any scans
5. Hospital room up to A ward
6. Medication during the stay
7. Any checkup cost or screening cost that’s done within 100 days before hospitalization
8. Any followup and checkup within 100 days after the hospitalization

These costs can really add up. That’s what it’s great that it’s taken cared of by this hospitalization insurance.

I recommend having this cushion regardless of whether you have a Term Life or Whole Life.

Thus, if I survive whatever almost killed me, the Life Insurance will only need to cover the longer term costs that will be recurring after the first 100 days after my hospital stay. Things like:

1. Long term medication.
2. Long term caretaker.
3. Any sort of regular procedures that don’t require hospitalization – like weekly dialysis, etc.

Those could get expensive too, but at least the huge upfront costs are already taken cared of by the hospitalisation plan.

Since I do have this, I’m much less afraid of anything that will happen that could potentially wipe out my family. This really helps make me much more comfortable to go with the Term Life plan since it just has to handle the more steady long-term expenses which is much easier to manage with my portfolio withdrawal.

Conclusion

So there you have it. Even though I’m throwing away the S$10,000 already paid to the insurance premium of the Whole Life insurance, I felt that the Term Life plan is a much better fit for my personal situation so I took the plunge.

Keep in mind that the above analysis and assessments only applied to my own specific insurance plans, life plans, and personal situation. Our circumstances will be very different so I’d caution you from making a decision on your own insurance based purely on this post.

However, I hope it helps give you an idea on how you could approach thinking about your own life insurance plans. Once you know what you want out of your life insurance and what you think you need, you should get in touch with an insurance professional or a financial planner to discuss the details. All this information will help your financial planner recommend products that fits your situation better.

Although this was overly long – hey it’s a complicated topic – I hope that this article was interesting and useful for you. Let me know whether this helps you make decisions around the insurance that you have by commenting below or tweet me @firepathlion. I’d love to hear with you think.

If you are interested in more posts related to insurance, I’ve also wrote about Early Critical Illness insurance and why I decided to purchase it. So you can check that out!

If you enjoyed this post, it would make my day if you could help share this article with your friends who might also find it interesting. Thank you!

Until next time.

FPL