Look at the contradicting statement here.
Firstly you say insurance is suppose to replace one's income if one were to pass away during working years of their life. Isn't that what a Term insurance does? Give dependents an substantially more income if one were to pass away during working years of their life?
And then you talk about adding ability to add into one's assets when one is in 80s, 90s... Isn't that what the investment part of BTIR is about? Adding way more $$ than ILP after a long term investing?
If you are an insurance agent, you should know term pays more for the same amount of $$ than ILP. So even paying a lower premium term insurance and investing the rest of the $$ works out the best for both insurance and investment.
I agree and disagree.
The biggest downside of term insurance is that it cannot be renewed after a certain age is reached. So having term insurance alone is not good if one needs to be insured at old age. This is the sole reason why people do not buy term insurance. For those who buy, it is useful when used in conjunction with other investments or insurance products, as you have rightly pointed out. The other point I disagree with is with returns, nothing is guaranteed.
I do however agree on this idea, that picking our own investments can lead to better outcomes, just as much as the opposite applies.
This section is for the TS as the TS did not mention what other types of insurance or investments he/she has.
Whether one buys an ILP or term insurance coupled with own investments, where the investment risk is concerned, lies with oneself. By this, I mean that the value outside of the minimum sum assured i.e. the cash or redemption value is dependent on how the holder of the ILP or investor chooses the underlying investments.
So between the two options, it now boils down to how much better one can seek returns oneself vs that of the performance of portfolio managers managing the underlying funds of ILPs, less whatever administrative costs.
At his juncture, if the sole purpose for buying insurance is for protection till a ripe old age, forget about getting term insurance and investing on your own because term insurance cannot achieve protection till a ripe old age. If one is adequately insured through other means like owning participating traditional life policies, it is okay to buy ILPs or by term insurance and investing oneself.
Why not buy ILPs in place of traditional life policies? The difference is that for traditional life policies, the investment risk is born by the insurer. Again, outside of the minimum sum assured, the insurer will have to seek the returns to compensate the cash value for traditional life policies. With ILPs, the cash value is dependent upon the funds the insured chooses and the performance of the portfolio manager of the underlying fund.
It is possible that your fund selection can beat that of a portfolio manager managing a traditional life policy, assuming that your timing is right with your fund switches. If so, why buy a traditional life policy vs a ILP? The problem is with the insurance element that you pay at an advanced age, it tends to be more expensive and can outstrip the premium that you pay resulting in deductions from the fund units that you hold. So if the markets are down and your total fund value trades at a discount of what you purchased those units from, you are essentially realising a loss.
Where with traditional life policies, the insurance element tends to be cheaper as it has been taken into account at the inception of the policy. In other words, with traditional life policies, the cost of the insurance element is spread i.e. pay more earlier and less later relative to ILPs.
Overall, a traditional life policy is more stable and in my opinion should be thought of as the first type of insurance policy to buy.
Now back to ILPs vs term and own investments. Perisher has a point when he mentioned that it is better to invest in a term insurance and invest oneself. The only condition which TS needs to understand is this, if TS is considering either options, just understand that term or ILP as a form of protection is only good up till a certain age. The best beneficiaries of such policies are for children.
As for investment returns of funds via ILPs vs own investments, neither are better nor worse. It boils down to ones own abilities in investing and time spent doing it. Many stocks that can weather a recession can yield more than what a fund can return when emerging from a recession. Take for example now, with energy companies going through a down cycle, would someone who is not familiar with the energy markets know which stocks to take advantage of? Buying an energy fund that is highly correlated with energy stocks would have it's benefits as an investor does not need to constantly monitor individual stocks. The energy fund is not likely to perform as well as the correct individual energy stocks when the markets pick up, but the benefit is that the holder of the fund will not have to do too much work. Extrapolate this a little, TS will see that correct individual stocks performance will be better than funds purchased independently of ILPs. So where ILPs are concerned, does the insurer offer an energy fund that the insured can take advantage of and are the portfolio managers of the underlying funds performing better than their counterparts? There is a lot more to investing funds and individual stocks that I find impossible to cover in this thread.
So for the TS, this is what you should consider. Buy a traditional life policy if you do not have one or if your insurance coverage is insufficient. Buy it when you are still young. The immediate reply should have been this.
As for ILPs, do not buy if your knowledge of ILPs is flimsy, if you are hearing about ILPs the first time around and most importantly, if you have no idea of what investments and stock picking is about. If TS is a male, buying ILPs without the proper understanding is almost like marrying a girl whom you have not seen, do not know and have no prior idea of what a relationship is about.
