Why Whole-Life Insurance Is Like Picking Your Nose

There are some things that I would never pay someone to do for me. Like brushing my teeth. Or reading. Or organizing my iTunes library. Or picking my nose. Even if there was someone offering  these services on Craigslist, I wouldn’t pay him a dime because 1) he’s probably expensive as hell and 2) he would probably do a shitty job. Like I have serious doubts that a Professional Nose Picker would be able to offer as much nose picking satisfaction than what I would have been able to do myself.

Now think of an insurance company as a dentist offering additional professional nose picking services on the side. I’d pay him to protect my teeth – that’s his job. But hell to the no on the nose-picking services. He’d be expensive, and I could totally do it way better if I did it myself.

Whole-life insurance plans (also commonly known as “investment-linked plans”) is kind of like a professional nose-picking service. My insurance company’s job is to protect my family against the risk of a huge anvil plastered with the words “ACME” falling on my head. But it has no business poking its head in my investments, which should be growing as time goes by so that I can buy my own badass anvil protection.

But the sad fact is, most insurance agents are incentivized to sell you whole-life investment-linked plans, or a similarly pricy product. The result? Most Singaporeans blindly listen to them, because we assume that they’re “professionals”.

But the professionals may not always have your best interests at heart (Think of all the doctors who prescribe unnecessary -and costly- treatments because it helps to line their pockets, but that’s another rant I have altogether). There’s a better way to do this: Buy Term and Invest the Rest (or BTITR for short, because Singaporeans love acronyms).

So why BTITR?

1. It’s simple

Term insurance is the simplest form of insurance that exists. You pay monthly/annual premiums for a period of time, and if you die/get injured/get killed by Loki’s Chitauri army before the Avengers save you, your insurance company pays you a helluva lot of money. It’s simple – you’re not mixing your savings, or investments, or speculation, or livelihood, into your protection needs. Contrast this with whole-life insurance, where you have to worry about where you’re gonna invest your premiums, how your funds are doing, and argue with your agent on the administrative fees. Way too complicated.

2. It’s cheap

The premiums for term insurance are often around 10x less than those for whole-life insurance. You’re paying for the simplest protection needs – so there really isn’t much administration that needs to go into servicing your plan, which translates into a cheaper premium.

Tan Kin Lian (presidential candidate that got an embarrassing number of votes at the last Singapore presidential election, but gives really good financial advice on his blog nonetheless) estimates that you would pay only $10,800 over 30 years for term insurance, compared to $180,000 over 30 years for a whole life insurance plan with the same coverage. This table also compares how much cheaper your premiums will be for term vs whole life.

3. You get way better returns by investing on your own

This is my favorite part. Instead of spending a bomb on whole life insurance, buy term insurance instead, take the amount you saved and invest it in a low-cost index fund.

Using conservative assumptions, Tan Kin Lian shows pretty decisively that you would end up with more money by investing on your own instead of relying on an insurance company to invest on your behalf. To give you an idea of the figures, you’d end up with around $390,000 if you’d invested on your own after 30 years, vs approximately $270,000 if you’d relied on the insurance company to invest for you. And the difference is even greater if you extend the coverage period.

Why the difference? The key is that 15-20% of your premiums go into administrative fees and commissions for servicing your account in a whole-life insurance plan. And for the remaining 80% that does get invested into unit trusts (or mutual funds, as they call ’em in the US), you’re charged an annual “management fee” of 1-2% of your funds. After all of these fees, your whole-life insurance plan should return approximately 2.5% per annum, if you’re lucky. Contrast this to the return of an index fund like the STI ETF, which should return at least 5% per annum even if you’re conservative. The difference between 2.5% and 5% may seem puny, but extend that outperformance to 30 years and that translates into a whopping $120 grand.

So don’t be a pansy. Buy term and invest the rest, and have fun picking your own nose.