The case for having a traditional life plan and a term life plan. Do you agree?

June 6

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My readers would know that I only have term life insurance in my insurance portfolio that are fuss free and simple monthly expenses paid to manage the risks of death or disability. It's ultra light weight and does not take up too much of my monthly expenditure.

Recently I had an interesting conversation with my insurance agent who services my family's hospitalisation insurance policies and he share an interesting perspective about why he advises his clients to hold a traditional life insurance as the basis of their insurance portfolio and further supplement with term life insurance to layer on additional death and total and permanent disability (TPD) insurance coverage.

The goal is for his customers to be able to afford to pay for adequate insurance coverage no matter how bad the circumstances becomes.

I felt it was interesting enough to warrant writing a blog article about it and let you decide if you agree with this view point.

How much insurance do you need?

To keep this article simple, I'll only focus on the death coverage of an insurance portfolio. You should always have a holistic approach towards building an insurance portfolio that covers you adequately across all the different risks such as death, TPD, personal accident, disability, etc.

Life Insurance Association (LIA) recommends to have around 9-10 times of your annual income as basic life cover. Let's use 10 times of your annual income because it's easier to calculate.

Assuming your monthly salary is $6,000, having 10 times of your annual income as coverage works out to be $720,000.

To have $720,000 worth of death coverage with a traditional life insurance policy would be very expensive in my opinion so let's say we look at protecting ourselves with $300,000 worth of death coverage using traditional life insurance and supplement ourselves with a term life insurance with $420,000 worth of death coverage.

The insurance plans I will be using for discussion

I will be using life insurance plans offered by NTUC Income because they make it easy for consumers like you and me to generate life insurance quotations online on our own easily using their life insurance online portal.

The traditional life insurance plan that I will be using for this article is NTUC Income's Star Assure Whole Life insurance which offers up to 500% of your sum assured against death, terminal illness, and total and permanent disability (TPD before the anniversary immediately after the insured reaches the age of 70).

I felt that's a decent value for money traditional life insurance plan on their life insurance online portal (however, it's worth mentioning that the online portal only allows me to multiply up to 300% of the sum assured) so I chose to use this insurance plan with a 20-year premium term as an example. With a $100,000 sum assured Star Assure Whole Life insurance, I can get up to $300,000 in death coverage till age 70.

The term life insurance plan that I will be using for this article is NTUC Income's DIRECT Term life insurance (non-renewable) because it was the cheapest in terms of premiums that I could find in their online portal. As the online portal only allows me to generate quotations up to $400,000 in death coverage, we'll have to stick to that for this article.

YOU NEED TO READ THIS: This is NOT a recommendation to buy the Star Assure or DIRECT Term life insurance plans offered by NTUC Income. I am simply using these insurance plans in this article as an example simply because it's easily to generate quotations of these insurance plans on my own and these insurance plans meet my belief that there is no need to have too much death coverage after the age of 65 when I don't have dependents that require me to support.

Let's look at the figures

I used my own personal information (38 years old, male, non-smoker) to generate the insurance quotes to see how everything looks like for me and here are the policy figures look like for me.

Insurance Plan

Premium Term (Years)

Policy Term (Years)

Sum Assured

Monthly Premium

DIRECT Term

(non-renewable)

26

26 (till age 64)

$400,000

$57.10

Star Assure (Minimum Protection Value: 300%)

20

Whole of Life

$100,000 (multiplied to $300,000 till age 70)

$228.00

To continue enjoying adequate death coverage, I would need to be able to afford to pay $285.10 each month. This is definitely more than the monthly cost of my entire insurance portfolio combined.

Is it worth the additional cost? Lets investigate further.

Treat the cash value from traditional life insurance as a form of protection

Many people think of the cash value of a traditional life insurance plan as a form of savings or even wealth accumulation if they bought an Investment-Linked Policy (ILP). But as we become more financially savvy and have access to more investment options, it's hard not to feel that the growth of the cash value in traditional life insurance plans is too low and complain about the opportunity cost that we are missing out on potential gains that could have been made using other investment options.

It doesn't help that traditional life insurance that invests our money into participating funds are mostly allocated into fixed income investments with lower risks.

But what if we change our perspective?

Instead of looking at the cash value from traditional life insurance plans as savings or wealth accumulation, how about we think of the cash value as a reserve fund for rainy days when we have problem paying for the monthly premiums to prevent the insurance plans from lapsing?

It's similar to how the Singapore government has diligently socked away money in their reserve fund so that when the COVID-19 pandemic hit, they were able to tap on the reserves to keep the lights on and support struggling businesses and Singaporeans.

Let's look at how the cash value accumulates in the Star Assure plan by examining the surrender value illustrated in the quotation.

Being the pessimistic me, I always look at only the guaranteed return and treat any non-guaranteed return as a bonus.

If everything goes smoothly, I would have built up a decent reserve fund of $3,900 at the end of the 4th year of holding the policy. While the money looks measly, it's slightly more than 12 months' worth of the insurance premiums ($3,421.20) needed to maintain both the Star Assure traditional life plan and DIRECT Term (non renewable) term life plan.

Should a black swan event such as losing my job due to retrenchment were to happen to me after 2025, I could tap on the cash value of my Star Assure traditional insurance plan to pay for my monthly fixed expenses of insurance premiums for at least 1 year while I continue to look for a new job.

By doing so, the burden of my fixed expenses would be reduced and my emergency cash savings would be able to last longer until I find a new job.

Using the cash value from the traditional insurance plan to pay for insurance premiums

Let's say an unfortunate event happened and you now have to make a choice between paying your insurance premiums and putting food on the table. I would definitely choose the latter for survival.

When that happens, how do we tap on the cash value from the traditional insurance plan to pay for the monthly premiums to prevent the insurance policies from lapsing?

For the traditional life insurance which holds cash value, you can simply tap on the Automatic Premium Loan (APL) feature.

APL is a common non-forfeiture feature that prevents the insurance policy from being terminated when premiums due are not paid after the grace period. When that happens, the insurer will advance the premiums on your behalf so that the insurance policy remains in-force. This feature will only work if the insurance policy has enough cash value.

Just like its name, APL is is treated as a loan and interest is charged. If the combined loan and interest is more than the cash value, the insurance policy will cease. APL interest rate is typically around 6-7% per annum and in the case of NTUC Income, their APL interest rate is 5.5%. To learn more about how APL works, you can contact your favourite insurance agent to find out more.

There's also another way by converting your insurance policy to a paid-up policy where you will retain some form of minimal coverage and will not need to pay anymore premiums. I will not discuss this option because it reduces your insurance coverage which defeats the purpose of this article.

As for the term life insurance, since it does not hold any cash value, the insurance policy would lapse once you miss the grace period to pay your insurance premiums. That's where the benefits of having a traditional life insurance comes in. If your traditional life insurance has accumulated sufficient cash value in the policy (4 years in my opinion for this example), you can choose to partially surrender a portion of the cash value of your traditional life insurance to pay the premiums of your term life insurance.

One of the key difference between paying your premiums with APL and partially surrendering the cash value of your policy to pay for your premiums is that you can repay your APL to put money back into your traditional life insurance when your situation improves while cash value surrendered cannot be refunded back into the policy after it has been withdrawn.

Is this worth doing this?

If you are financially savvy and are diligently managing your personal finance, you would probably also have 6 months to 1 year worth of emergency cash savings that can pay for all your expenses, including insurance premiums if a black swan event happens to you and disrupts your regular income.

You wouldn't need to bother about anything that was written earlier.

I personally set aside a year's worth of expenses, including my insurance premiums in my emergency cash savings fund so I don't think this combination of traditional life insurance and term life insurance isn't necessary for me.

However, I don't think majority of the population is financially savvy and diligently managing their finances, keeping 6 months to 1 year worth of emergency cash savings to prepare for black swan events. Having a combination of traditional life insurance and term life insurance could work well for these people.

But of course, I only wrote about how this perspective could work for insurance specifically on death coverage. Ultimately we should look at insurance from a holistic coverage that covers death, illness, accident and other aspects of risks.

I am not an insurance agent so I am just evaluating this perspective from my point of view. If you agree with looking at the cash value of an insurance policy as a form of protection to stay insured regardless of what life throws at you, you can share this article with your trusted insurance agent to discuss how planning your insurance portfolio from this perspective could work for you.

Do you agree with this perspective? Share your thoughts in the comment section below.

You won't trust Mickey Mouse to manage your portfolio so there's no reason to trust Mickey J to make insurance or investment decisions for you either. The contents in this article should be considered as entertainment until you do your own due diligence and make your own insurance decisions.

Photo by Ricardo Resende on Unsplash

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About the author 

Mickey J

Mickey is your typical white-collar Singaporean who works regular hours in a job with a strong passion on personal finance. He writes mostly about personal finance, investing, insurance and retirement planning. He also embraces the Financial Independence and Retire Early movement (FIRE), tweaking the FIRE concept to his lifestyle.

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  • Based on real life experience (I moonlighted in insurance sales for 2 years during 2009-2010), if a person were to be jobless for 3 months or more (or even if a big salary reduction in a new job), most of the time the person will surrender the wholelife insurance rather than APL or paid-up.

    The cost of APL or paid-up is very high — high interest in the case of APL, and low coverage in the case of paid-up. Unless the person has contracted a health issue in the meantime that prevents new coverage at standard life, it is more cost effective to reduce the sum assured.

    When you buy a wholelife, you’re paying a high insurance cost because the insurers base it on the assumption that you will hold until die or claim (TPD or CI). So the whole cost structure is such that they take it that they WILL SURELY pay you/your family the death coverage eventually. If this is the case, how will you as the provider charge your customers? 😉

    • Thanks for sharing your experience.

      First of all, I would like to clarify that the cost of APL isn’t that high for someone who is jobless for 3-6 months because it’s only 5-6% per year and can be easily covered back once the person finds a new job and proceeds to repay the APL. Not going to comment about paid-up because that reduces the necessary coverage that the person needs for risk management. I’m advocating to take up the APL for the short term with the aim of paying it back once the situation turns positive again and not to take the APL and leave it incurring interest for the long run.

      Secondly, I feel that it’s an issue if the individual chooses to simply surrender the whole life insurance instead of APL or paid-up simply because he/she is jobless for 3 months or more (or just experience a salary reduction). Because it’s precisely that point in time where the person needs insurance coverage even more because if something were to happen to him/her during the unemployment, that’s where the insurance coverage kicks in to cover the sudden expense. I guess I’d have less of an issue if that person switches to a term insurance (but I doubt that’s normally the case and insurability may become an issue) to continue having adequate cover.

      Lastly, the insurance cost is high usually because it’s a level premium across all years so you have to pay more now so that you aren’t paying more later. Otherwise it’d have been an escalating premium charge like those renewable term life insurance. I don’t see this as a problem because the individual should be buying the whole life plan with the aim to pay through all the years and hold on to the policy. So insurers should price their plans with that aim in mind as well.

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