Of course there are massive costs in the early years - how else is the insurance company going to recoup its loss in the event the policy is terminated early? It is very common to see ILP holders viewing it as an investment product when it is not meant to be one. When seen in that misguided light, the insurer has to take sufficient precaution against early termination.
That said, certain companies have better plans than others, depending if the penalties are front or back ended.
I'm sorry, pray tell - what losses exactly does the insurance company suffer when the plan is terminated early?
Nobody is saying that insurance or investments are free from costs or charges. Costs and charges are inevitable, but massive and hefty upfront charges of an ILP are avoidable.
The charges are inconsequential IF you view it as a life policy for the long term, and have purchased it at an age where your risk of death, TPD, TI and CI (if you have a rider that covers it) is very low, I.E. Early 20s to 30s. As mentioned, most people buy ILPs with an incorrect outlook in the first place, but this is an issue that is dependent on the agents who sold them.
Of course it's inconsequential to you since the more the policyholder puts in, the more you stand to earn.
Of course the premium holidays and coverage adjustment are just gimmicks - they are there as 'bonuses' for the less informed advisers to sell as 'perks'. I never use them as a basis for recommending a product.
Then what is your basis for saying that ILP is good insurance when BTIR gives all of its benefits and keeps costs and charges equitable for the consumer?
That option is possible - if you have sufficient cash flow. Sufficient term coverage of an adequate duration is expensive for young adults who are just starting work, or young families who have high liabilities, since you are essentially paying now to offset the charges you'll incur at a much later date.
Thanks for the laugh again! I begin to wonder if you're just parodying the usual insurance agent who just peddles products for commissions and incentive trips.
Did you just say that term insurance is expensive, and since we're comparing it to ILP here - MORE expensive than ILP?
Whatever advantages the Yearly-Renewable Term of an ILP gives over a level term is obliterated by the fact that the policyholder suffers huge upfront charges in the early years of the policy and hence the huge opportunity loss arising from time value of money and compounding effect. In fact, the policyholder is worse off.
In any case, if one believes in the benefit of a Yearly-Renewable Term, then get a Yearly-Renewable Term on its own! QED.
I get the point about risk level, effect and (potentially) better returns, but why liquidity when the purpose of an ILP is not as an investment tool? You are not supposed to withdraw the value in the first place.
The policyholder's liquidity is of course irrelevant to you since you have everything to gain from the policyholder losing his/her liquidity and nothing to lose.
The time taken for your investment to grow to a certain level has to be taken into account as well. It is similar to the break even point for an ILP's fund.
This is akin to saying: There is time taken for someone to drive from Jurong to Tampines. It is similar to the fact that there is time taken for someone to walk from Jurong to Tampines.
Let's assume John has $2,000 for insurance and investments. He picks up a term policy for $200 and puts $1,800 into an investment fund. Peter puts $2,000 into an ILP life plan.
How long does an ILP life plan take to break even at 9% pa? I have a sample quotation that shows 13 years (This is with the insurance portion "maxed out". I'm sure there are advisers who will reduce the insurance portion so the investment part looks more impressive.) At a similar assumed 9% pa return (with it reduced to 7.5% to include expense ratio), a BTIR strategy will take 2 years to "break even", i.e. 2 years x $2,000.
Even if you take liquidity out of the picture, the BTIR strategy will provide a better "cash value" based on simple mathematics. The reason is simple - the BTIR has nearly all of the "premiums" ($1,800 out of John's $2,000 budget) invested, whereas Peter has given most of his first few years' premiums to the agent. Due to the upfront nature of the massive charges as well as the time value of money, the ILP will always be a inferior to the BTIR. Investment returns aside, insurance coverage wise as well.
The other factor to consider is your risk appetite - a risk-inclined person may want to consider the potential upside of the ILP's sum assured based on the NAV being greater than that offered by a traditional policy. The downside is that if he (or she) bases his (or her) protection on that policy alone, there is a sizable risk involving inadequate protection in the event of a market downturn.
I'm comparing between ILP plan vs BTIR. BTIR is superior to ILP plans aside from "whole life cover" - which is a moot point because ILP charges escalates too much in the older years of a policyholder and becomes unsustainable, and BTIR obviates the need of insurance through accumulating enough for self-insurance.
Anyway I need to summarise some points you've made in larger font because they're too hilarious for people to miss:
- Term insurance is more expensive than ILP
- ILP charges are inconsequential
- Liquidity is not important
- Akan datang, 0% in first year never mind cause need time for the money to grow mah. Will be as fast as having my money 90% invested right from the first year.
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