You will be able to model buying term cover and investing the difference, including the risks that make it fail.
Mention whole life in any online money forum and someone replies within minutes: buy term and invest the rest. It's often said as if it settles the question. Sometimes it's right. But the people who say it rarely show the numbers, and almost never show the ways it goes wrong. This lesson does both with Jun Hao's two quotes.
Buy term and invest the rest means buying term cover for the protection you need, and investing the difference between the term premium and what a whole life plan would have cost, every year, in a low-cost portfolio. You compare two outcomes: the whole life policy's values, and the term cover plus the portfolio you built.
Every figure below is an example made up for the lesson, not a quote from any insurer.
Ryan's whole life plan: S$200,000 sum assured for S$4,000 a year, premiums for 30 years. A term quote for the same S$200,000 to age 65 comes to S$400 a year, so the difference Jun Hao would invest is S$3,600 a year.
The common mistake is to run the model at one optimistic return, often whatever the market did over the last decade. A fair model uses a range and takes fund costs off first.
Jun Hao used three gross returns: 3%, 5% and 7% a year. He took 0.5% a year off each for fund and platform costs, leaving net returns of 2.5%, 4.5% and 6.5%. He assumed he invests S$3,600 at the start of each year for 30 years. In a spreadsheet, that's =FV(rate, 30, -3600, 0, 1) for each rate.
The results at year 30, when he would be 64:
at 2.5% net, about S$162,000 at 4.5% net, about S$229,500 at 6.5% net, about S$331,200
Set those beside the whole life surrender values at year 30 from lesson 3.2: S$95,000 guaranteed, S$150,000 at the lower illustrated rate and S$190,000 at the higher one. He'd have put in S$108,000 of differences over 30 years, against S$120,000 of whole life premiums.
At the low return, the portfolio beats the whole life's guaranteed value but is only modestly ahead of the projected total at the lower rate, and behind the S$190,000 at the higher one. At the middle and high returns, the portfolio is clearly ahead. Earlier on the gap is smaller still: at year 10 the portfolio would be about S$41,000 to S$52,000 across the three returns, against S$22,000 guaranteed and S$33,000 to S$37,000 projected for the whole life plan.
So far the model favours term plus investing, unless returns are poor. The rest of this lesson is about the conditions it quietly assumes.
The model assumes Jun Hao invests S$3,600 every single year for 30 years, and never touches it. A whole life premium is collected whether he feels like paying or not. The investing is up to him.
Suppose he invests only half the difference, S$1,800 a year, and spends the rest on things that seem urgent at the time. At 2.5% net that builds about S$81,000 by year 30, less than the whole life's guaranteed S$95,000. The model has failed, and not because of markets.
The same happens if he sells after a crash, raids the account for a renovation, or stops investing when a second child arrives. So look honestly at your own record: if you've kept a regular investment going through a bad year before, the model is realistic for you, and if you haven't, give that real weight.
At 65 the term policy ends. If Jun Hao dies at 66, the term pays nothing. The whole life policy would pay at least its S$200,000 guaranteed death benefit, plus bonuses, at any age.
Buy term and invest the rest says this doesn't matter, because by 65 the portfolio has replaced the need for cover: Elise is grown, the loan is paid, and the S$162,000 to S$331,000 portfolio is there for Mei. For most families that reasoning holds up. Lesson 2.3, Set the term from your youngest dependant and your loan, showed that Jun Hao's need ends at 58.
But it means the investments must do the job the cover did. Investments can fall. A crash in year 29 could take a third off the portfolio just before he needs it. And if his need for cover lasts for life, for a reason lesson 3.5 looks at, term plus investing leaves that need unmet after 65.
A few more points belong in an honest comparison. Term premiums for cover to 65 are usually level, but a term policy renewed later, after the first term, costs much more at an older age and depends on your health then. The whole life plan may include riders, such as critical illness, that the term quote must match for a fair test. And the whole life plan's projected values depend on bonuses, while the portfolio depends on markets, so neither side of the comparison is certain.
The comparison only means something with your own numbers. You need a whole life quote and a term quote for the same sum assured, ideally with the same riders, and the yearly difference between them. That difference is the amount you would have to invest without fail, and lesson 3.6, Compare three structures on the same premium, builds the full model from it.
Write the premium for a whole life plan and a term plan with the same cover, and the yearly difference you would need to invest.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).