The Truth about Whole Life Insurance: You are losing out on a Lot of Money

I have been wondering if whole life insurance makes sense. Does it ever beat buy term and invest the rest?

After doing the maths, the clear answer is No.

To arrive to this conclusion, I looked at two common term and whole life plans, summed up the investment returns and deducted the premiums paid, to arrive to a total benefit.

Let’s compare the plans with as similar parameters as possible.

Term Plan Total Costs

Term Plan: MINDEF Group Insurance with Life cover : $300,000 death coverage with Critical Illness (CI) rider of $250,000. Start age of 30, ending at 70. Male.

All the exact premiums have been added per age, as per here.

Age CI rider monthly cost Main cover monthly cost Annual cost
31$15$12$328
32$15$12$328
33$15$12$328
34$15$12$328
35$15$12$328
36$25$12$445
37$25$12$445
38$25$12$445
39$25$12$445
40$25$12$445
41$25$12$445
42$25$12$445
43$25$12$445
44$25$12$445
45$25$12$445
46$69$12$973
47$69$12$973
48$69$12$973
49$69$12$973
50$69$12$973
51$105$12$1,408
52$105$12$1,408
53$105$12$1,408
54$105$12$1,408
55$105$12$1,408
56$145$12$1,888
57$145$12$1,888
58$145$12$1,888
59$145$12$1,888
60$145$12$1,888
61$202$12$2,569
62$202$12$2,569
63$202$12$2,569
64$202$12$2,569
65$202$12$2,569
66$263$176$5,267
67$294$200$5,926
68$329$242$6,843
69$368$287$7,858
70$412$318$8,763
Total premiums paid: Up to 61$40,266
Up to 70$74,923

Whole Life Total Costs and Accumulated Value

Now let’s look at a whole life plan, without naming it. This is actually a plan that I had. Slightly less coverage at $250,000 as compared with the term plan, but with a $3,717 premium, payable for only 15 years.

I assume an investment return of 3.5% per year. The total premiums paid are $55,755, ending at 45 years old. The accumulated value would be $314,273 by age 70.

I don’t think all the premiums paid actually go into accumulated value. There are other costs like distribution and fees. But for the sake of simplicity, I assume that all the premiums go into the policy owner’s accumulated value.

Age Annual payment Accumulated Value
31$3,717$3,717
32$3,717$7,564
33$3,717$11,546
34$3,717$15,667
35$3,717$19,932
36$3,717$24,347
37$3,717$28,916
38$3,717$33,645
39$3,717$38,540
40$3,717$43,606
41$3,717$48,849
42$3,717$54,275
43$3,717$59,892
44$3,717$65,705
45$3,717$71,722
46$77,949
47Total premiums paid: $84,395
48$55,755$91,065
49$97,970
50$105,116
51$112,512
52$120,167
53$128,089
54$136,289
55$144,777
56$153,561
57$162,652
58$172,062
59$181,801
60$191,881
61$202,314
62$213,112
63$224,288
64$235,855
65$247,827
66$260,218
67$273,043
68$286,316
69$300,054
70$314,273

Buying Term and Investing the Rest

Now, I deduct the difference between the premiums of the two plans, and invest it in the S&P 500 index . This is called buy term and invest the rest. I assume a return of 8%. I stop adding new funds at year 15, and just keep rolling over the sum every year at 8%.

Age Investment returns at 8%
31$3,389
32$7,050
33$11,003
34$15,273
35$19,884
36$24,747
37$30,000
38$35,672
39$41,798
40$48,414
41$55,560
42$63,277
43$71,612
44$80,613
45$90,334
46$96,589
47$104,316
48$112,661
49$121,674
50$131,408
51$141,920
52$153,274
53$165,536
54$178,779
55$193,081
56$208,528
57$225,210
58$243,227
59$262,685
60$283,699
61$306,395
62$330,907
63$357,380
64$385,970
65$416,848
66$450,195
67$486,211
68$525,108
69$567,116
70$612,486

Conclusion

Finally, lets look at the difference in returns at age 70:

Investment returns Premiums paid Net benefit
Whole Life returns from 30 – 70 $314,273$55,755$258,518
Term Life returns from 30 – 70$612,486$74,923$537,563

The term plan wins hands down, exceeding the returns by $279,000, while providing more protection. This is mainly due to the superior returns of stock market investing (~8%) vs letting the insurance company do it (~3%).

There are some other important points which show the term plan is even better than what the maths say:

  • The MINDEF Plan would still have death coverage if the CI pays out. So if you have already received a CI payout of $250,000, your estate will get another $300,000 upon death. But this isn’t true for the whole life plan, which does not have death coverage if CI happens first.

  • The MINDEF plan actually refunds premiums every once in a while. It’s something like 10%-20% a year I think.
  • The historical return of the S&P 500 is closer to 10% than 8%. This is of course not guaranteed in the future, but neither are insurance investment returns, which have always been significantly below the S&P 500 index returns.

  • I assumed a 3.5% return for the whole life plan. But I actually think given the low interest rate environment, the real rate of return will be closer to 2% for most whole life plans.

  • Whole life plans hurt investment returns by asking for a large premium early in life. This prevents the investment from compounding as much as it should. Term plans are better for investment as they are cheap early in life, and you can use the difference to invest in the stock market.
  • You have the full flexibility to take out your money in the stock market with a term plan strategy, usually getting the cash in 3 working days. Try pulling your money from a whole life policy. Even if the insurer allows it, there will be heavy penalties.

I can’t think of many situations where a whole life plan is better than a buying term and investing the rest. The only possible benefit I can think of is the “forced savings ” aspect, so people actually have to put money aside, don’t panic and sell their stocks when the market crashes. Still, that is a heavy price to pay for ignoring the news and chilling out.

I attach the excel file I used if anyone wants to check the numbers or input their own.

Hope you guys found this piece educational!

26 comments

  1. I think you are comparing apples to oranges. I have been on this debate all my blogging life.The whole life plan is suppose to insure you for whole life. So you got to compare the premiums of the term till 100 years old. My math shows me it is about the same. secondly, you have to make the asset allocation the same. you cannot get 8% rate of return on a bond dominated portfolio. For most their allocation is closer to 35% equities 65% bonds.

    Perhaps you can run you sum if the rate of return is closer to such a portfolio and see what you would get. there is a flaw to the term plan. when you are near 65 and you are switching to self insurance mode, the portfolio might not have accumulated enough such that if the assured passes away then, the sum at 65-70 years old will be in theory much lesser than a whole life plan.

    ultimately, buy term invest the rest forces the person to take more risks, and you wonder if the person can sit through the up and down (especially the recent ones).

    a lot of folks was more comfortable in plans like this because frankly they cannot take the volatility. a more moderate comparison will be a 60% equity 40% bonds portfolio.

    1. Hi Kyith,

      I can’t compare the premiums of term till 100 years old as that is the max for the MINDEF plan. I think most term plans also won’t go to 100 years for CI too. When I’m 100 years old, my kids should be like 70 years old and shouldn’t need the money anymore haha.

      I agree with you that a lot of folks won’t be able to take the ups and downs on the stock market. They will buy and sell at the worse times. For such people, whole life plans are a decent option.

      Thanks for your insights! I totally acknowledge that you have been in this business longer than I have

      1. When I started being more financially aware, there were term plans to 99 years old. So there are some basis of comparison. Over the years, I also realize that many of the buy term and invest the rest folks didn’t realize that this was to for protection not for retirement. the objective is that you wish to cover for the whole life. if that is the objective, I wonder that when you really need the money will you push the allocation up so drastically.

  2. thanks for the comparison, very helpful and informative. In fact it strengthen my decision to go for whole life plan πŸ™‚

    There are quite some intangible benefits with whole life plan, which are at least applicable to me. For example, BTIR requires emotionless mindset, forcing someone to be decipline regardless if the market is crashing / skyrocketing, for at least 30 years – this alone is a dealbreaker for me, as I couldn’t never be emotionless although i know it is absolutely the right way.

    Secondly, committing insurance premium past 55 years old will requires absolute decipline – one might decides to take chances and stop paying the rising expensive premium when he gets older, it is about total of 60k sgd premium from 55 yo to 70yo.

    Going for whole life plan ensures that my insurance aspect is being taken care of, so that I can concentrate in investing / active income.

    Nevertheless, good sharing πŸ™‚

  3. thanks for the comparison, very helpful and informative. In fact it strengthen my decision to go for whole life plan πŸ™‚

    There are quite some intangible benefits with whole life plan, which are at least applicable to me. For example, BTIR requires emotionless mindset, forcing someone to be decipline regardless if the market is crashing / skyrocketing, for at least 30 years – this alone is a dealbreaker for me, as I couldn’t never be emotionless although i know it is absolutely the right way.

    Secondly, committing insurance premium past 55 years old will requires absolute decipline – one might decides to take chances and stop paying the rising expensive premium when he gets older, it is about total of 60k sgd premium from 55 yo to 70yo.

    Going for whole life plan ensures that my insurance aspect is being taken care of, so that I can concentrate in investing / active income.

    Nevertheless, good sharing !

  4. Generally agree with the article. 2 possible reasons for wholelife:

    1) Creating relatively cheap trust funds for your family members that are protected from creditors. Note that if you opt for this, you can’t change the beneficiaries without their consent, even after divorce.

    2) Pre-pay for CI cover for your twilight years. You’ll need strong discipline not to cash out, until maybe say after 80 yrs old. Else it’s not really worth it.

    Large life coverage is meant for when you have dependents. When your kids become financially self- sustaining & when your parents pass away, you no longer really need life cover.

    And if you have dependents such as 2 kids & / or parents, you’ll need 15-20 yrs of expenses amount to be sufficient. Wholelife to provide this amount of sum assured is very exorbitant.

    90% of people won’t be able to take market corrections or bear markets. I believe that most Singaporeans will do better by buying term & stuffing the rest into CPF-SA and Medisave to the limits. Especially when they start early in their 20s to mid-30s.

    1. Yes, agree with what you say. Providing 15-20 years of expenses through whole life is crazy.

      Unfortunately what you say about 90% of people being unable to take bear markets is true also. Fact of life ba

  5. Thank you for the very informative post with the calculations.
    I have thought about this about 2 years ago. I already had in mind that term was better than whole life because I would rather invest the premium difference in the stock market. However, I end up not buying term at all because if I were to die, the money in my CPF, critical illness and other plans will add up to a substantial enough amount for my current dependents, which is more than enough already.
    Term plan allows for flexibility, adjusting for the dependents you have at different time points. Sure, you can argue that buying at a younger age is cheaper, but is it just FOMO or is it really needed? Who really needs 1 million of your death money to survive in singapore? It just doesn’t make sense for me to suffer paying through the nose for the premiums every month. Just my 2 cents.

    1. Hi owlcents,

      Yes, if your dependents have enough, agree that there is no need for even more protection for them through term.

      To me, getting a CI is worse than death because you have to live on and still sustain yourself and your family. If die already, its much simpler. So make sure you have enough for yourself in that situation.

      1. Haha yes I agree! Sometimes I wish we were able to make that choice between CI and death though, too bad we can’t.

    1. A policy loan charges pretty high interest rate of around 5% at least, for you to borrow from your own savings… doesn’t make a lot of sense to me.

      1. It make sense when you’re temporarily out of a job and no money to pay the premiums. At the same time, you can’t afford to have a policy lapse. More for sole bread winners, I would say.

  6. The rate of return for both to start off is already skewed. Yes, you can say S&P 500 gives historically up to 10% returns but that doesn’t mean you should skew your comparison and not match the 3.5% on the Whole Life.

    And Term Insurance coverage is level. You cannot ignore the fact that Whole Life insurance coverage increases overtime and will continue to increase.

    Comparing just based on premiums vs. returns does not make it a fair comparison.

    Just my POV

    1. Hi Alvin, thanks for your POV.

      I think that the comparison between S&P 500 returns is fair.. I cannot artificially bring down its historically accurate average return of 8%- 10%, to 3.5%. The point of the article is to compare investing with the insurance company vs investing on your own.

      As far as I know, whole life insurance coverage doesn’t increase over time. The cash value does, but you don’t get both the cash value and the insurance benefit when you redeem the policy. You may mean the premium for whole life stays level over time. Premiums for term plans do increase as you age.

      Thanks for your time taken to read and comment!

  7. Nice. I did the same calculations as you but agree with Kyith about comparing apples to orange due to asset allocation. Digging deeper into the T&Cs of the mindef aviva plan, one needs to know that it’s a group insurance and you dont own it too. Premiums are not level. That is a red flag to me.
    The most optimal way to buy Whole Life is when one is young (age zero to be specific) where premium quantum are low and you can fixed it for a limited pay period. This enforces discipline and yet allows for liquidity, in addition to protection for whole of life.
    Whole life plans have a place in my family portfolio as a diversification strategy. And I know that willpower is never enough. Better to lock myself in part if possible.

    1. The assumptions are based on historical data and not ideal situations, but yes it’s up to each person’s comfort level. Thanks for reading and commenting!

    2. There are many ideal assumptions. But the 3 biggest one are

      1. AVIVA Group term insurance availability and premium rates.

      2. The need of insurance after age 70.

      3. The mental soundness of managing investment at every stage of life.

      1. Just asking, are you an insurance or financial advisor? I’ve noticed most of the resistance comes from these groups. I can understand where they are coming from as my personal experiences and thoughts tend to threaten their rice bowl. But I’m writing from an independent perspective, and have actually used my CI whole life policy. I came to regret buying the whole life as I would have gotten much more money from buying term. This is of course my own individual situation and doesn’t apply to everyone.

        There are a lot of assumptions about whole life too. Non-guaranteed returns come to mind, as well as the ability to keep paying sky-high premiums for at least 15 years or more. Quite a few people drop out when they can’t keep up and lose the coverage.

        Thanks for your comments and I appreciate you giving your views too. Take care

  8. Whether I am an adviser or not is not as critical to the 3 assumptions that I have raised.

    I am just sharing some views for the would be readers here who may be attracted by the title of your subject. Hope you will not see it as resistance. I am raising all these assumptions so that layman can spare a thought on those assumptions during their personal planning like what you have done for yourself.

    1. What if the AVIVA grp term is no longer available? Will the new provider offer similar coverage and rates? What if the new offer is not as attractive, will you be in the pink of health to be eligible for other plans at an older age? How sure are you about the rates offered remain the same in the next 20 – 30 yrs? Are you familiar with the payout terms and conditions of its benefits or you recognise the benefits based on its title when you compared the AVIVA term and whichever whole life insurance or did you just compare the price only?

    2. You are assuming your need of insurance is till age 70 which may not be the circumstances as the rest. If you have a home with lease till your age is 70yrs old, it may be comfortable for you but may not be as comfortable for the rest. What if you outlive the lease of your coverage? Would your total asset at age 70 be sufficient to take care of your living expenses for another 15 yrs since mortality age in Singapore have raised as shown in Stats?

    3. Mental soundness is becoming a concern. Illness such as dementia is a growing problem in Singapore. 5.2% of the Singaporeans who get past age 60 have dementia.
    Source: https://www.healthxchange.sg/seniors/ageing-concerns/dementia-singapore

    You may be Savvy in the handling of your investment portfolio now but in the unlikely event that such an unfortunate event like dementia occurs, your donee, family members, or trustee may not be as Savvy as you to deliver the Stellar returns… Which may lead to the possibility of insufficient wealth accumulated resulting in becoming a financial burden to family members.

    I am not disputing what you have wrote as you are basing on your personal experience as an unlicensed practioner view. I am just pointing out some potential blind spots to the other readers for their personal consideration when they are doing similar planning and making some irreversible decision which may impact their rest of their life.

    πŸ™‚

    1. Thanks for the comprehensive reply. It’s good that my readers challenge my assumptions and raise valid points. I never believe that there is only one right answer, and everyone has their unique circumstances. While I may hold a different view, I do appreciate you taking the time to read and comment. Hope you can continue to do so on my other posts, so others can benefit from your thoughts too

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