Tuesday, April 29, 2014

Choosing Between Term and Non-Term Life Insurance

If you read personal finance blogs or books long enough, you will surely encounter the "Buy term, invest the difference" phrase. This basically means to buy basic, no-frills insurance and invest the difference of what you would have spent on non-term life insurance (i.e. whole life, universal and their many permutations) in mutual funds or stocks, since that will usually guarantee a better yield than "investing" with non-term insurance.

At first glance this does seem like the correct move, but is it the right move for me? If there's anything I've learned from my Registered Financial Planning (RFP) class is that there is no cookie cutter solution for everyone. Needs are different and so it follows that solutions will likewise differ as well.

For example, I've been thinking of getting life insurance for my husband and so I looked at term insurance  with daily hospital income from PruLife. Here's the table of payments sent to me (this was sent last year, but let's just assume that the price is the same or if there is an increase that it is only minimal):


If I get term insurance of Php1,000,000 (Package 3) for my husband until he turns 65, this is how much we'll be spending:

Year 1= 45y.o. =  Php10,017.00
Years 2- 6 = 46 y.o. to 50 y.o. = Php74,270
Years 7-11 = 51 y.o. to 55 y.o. = Php114,855
Years 12-16 = 56 y.o. to 60 y.o. = Php178,145
Years 17-20 = 61 y.o. to 64 y.o. = Php220,172

Total premiums paid for 20 years= Php597,459

On the other hand, the quotation I got from the same company for basic whole life insurance for the same amount of Php1,000,000, excluding daily hospital income, for my husband is Php34,690 per year. If we avail of that policy and pay for the same 20 year period, the total premiums paid will be: Php693,800 (Php34,690 x 20 years).

That's a difference of Php96,341 between the premiums paid for term and basic whole life, which is honestly quite a negligible amount when spread out over a 20 year period.

Furthermore, a basic whole life policy has a built-in savings component which you can access if you need cash. Term insurance does not have the same advantage and whatever you pay for the year is considered gone if you don't kick the bucket within that year.

I realize though that my analogy isn't exactly apples to apples, because my example for whole life insurance does not have a daily hospital income rider and if it did have the same rider as the term insurance, then the premium will most definitely be higher. But my point is, do not discount non-term insurance right away by chanting "Buy term, invest the difference" like an automaton. See for yourself first if it will indeed be to your benefit to buy term.

From what I see, these are the people who will get the most from term insurance:

1. Those at the start of their careers or married lives, because it's exactly those people who are just starting out in life who need protection more (i.e. mortgages, car loans, young children);
2. Those who cannot afford the higher premiums of a basic or variable life insurance, but want the same degree of protection for their beneficiaries; and
3. Those who will actually invest the difference in stocks or mutual funds.

As always, buy insurance because you want to insure your earning capacity for your family's sake. Never do so for investment purposes. Investing should only be a secondary consideration when it comes to taking out a life insurance policy, because let's be real, there are other vehicles that outpace the returns of insurance funds year in and out, despite what your insurance agent might hint at.

If you have dependents and you want to secure their future, protect them by taking out life insurance on yourself or your spouse. There are no ifs and buts about it.


P.S.
I do not claim to be an insurance expert by any means, neither am I affiliated with any insurance company. These are just the ramblings of an ordinary person who takes insurance coverage seriously.

2 comments:

  1. Im a bit skeptical now when it comes to any insurance company in Phil. My mom was a member before with Prudential Life but the company got bankcrupt and unfortunately we did not get any small penny from them :(

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    1. That's what happened with my mom too with our pre-need educational plans with College Assurance Plan (CAP), she was unable to use them even if she paid for them for many years.

      But what I'm talking about here is life insurance and not pre-need insurance. Unlike pre-need insurance, life insurance is strictly regulated and so there's little to no danger of them closing down like pre-need companies.

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