There has been a long-running and seemingly never-ending “term policy versus permanent life insurance” debate in the insurance circle. Each side has ardent supporters as well as equally passionate detractors. Needless to say, both term policy and permanent life insurance policy have their strong and weak points. This article asks a number of questions and presents arguments from both sides of the debate to help you come to your own conclusion.
Are you disciplined enough?
Proponents of “buy term policy and invest the difference” strategy argue that the difference in premium can be used to invest in other investment vehicles for potentially higher return than what a whole-life policy offers. They propose that if you invest diligently by applying the simple principle of “dollar cost averaging”, you will get a much higher return. This sounds very attractive. But the question is, “Are you disciplined enough to set aside a fixed amount of money every month for an alternative investment?” Let’s face the truth; most people aren’t. When you have some extra money, you can easily give into the temptation to buy something that has caught your eyes.
How big is the difference?
Since the difference in premium is the bone of contention here, the first thing to consider before making any decision is the size of the difference. If the difference is small, then the question of investing it in an alternative vehicle will probably not arise. For example, for a same insurance coverage, the average premium a 35 year old male, non-smoker, would have to pay a year on a whole life policy would be about $2,600 compared to $700 for a 30-year term policy. The difference, as you can see, w ould be about $1,900 a year which is not very much to invest in the first place. If, on the other hand, the difference in premium is substantially large, then you would have the capital for other investments. This is one factor one can consider when choosing between term policy and whole-life insurance policy.
Are you a natural investor?
Most investors like to believe that they are natural risk-takers and even brag about it. But their true colors are revealed as soon as the market starts going against them. When the Asian markets nosedived in 1997, most investors couldn’t wait to scramble out of the market fearing that they would lose everything. Looking back, this irrational behavior cost them a fortune. Had they held on, they would have made a huge pile by now instead of losing large chunk of their hard-earned money. Another quality a successful investor needs is the aptitude to time the market. To invest successfully, you must know when to enter the market and when to exit. In 1981, Hendriksson and Merton carried out an extensive research using “option pricing” to determine whether fund managers were good at timing the market. The empirical results did not prove that they were. If fund managers, equipped with all their analytical tools and reports, find it hard to time the market, what chance do you have? You would have to be an astute money manager to invest your money successfully; otherwise you might as well throw it down the drain. If you are not good at direct investing, then it’s better to put your money in whole life insurance as insurance companies usually have the strength to sail through the ups and downs of the market.
Insure yourself, protect others.
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The author of this article is Mr Sean Ong Ming Chuan. He is a Certified Life Coach and a Chartered Financial Consultant with more than 13 years of experience in the finance industry. A shareholder with the one of the largest independently-owned financial advisory company in Singapore, Sean also leads a top financial advisory group and has been featured on the local TV and radio. In his efforts to contribute to the society, Sean ran 1,000km over 87 days to successfully raise more than $13,000 for a children charity in Year 2012. He also published a book called “Mend Your Socks!” where sales proceeds were donated to charity. Sean can be contacted at email@example.com.