You will build a model comparing whole life, an ILP and term plus investing at the same yearly outlay over 30 years.
Jun Hao now had three options on the table, each described in its own document, each using its own assumptions and its own way of showing value. Ryan's whole life illustration ran to nine pages, the ILP illustration to eleven, and his own term-plus-investing sums sat in a spreadsheet. None of them could be compared at a glance. This exercise puts all three on one sheet, at the same yearly outlay, from the same starting age, so the differences are differences in structure and nothing else.
It takes about 40 minutes. You need a whole life illustration and an ILP illustration for roughly the same sum assured, and a term quote for that sum. Use real documents you've been given, or samples from insurers' websites.
Pick one yearly outlay, usually the whole life premium, and use it for all three structures. For term plus investing, the outlay is the term premium plus the amount invested, so the amount invested is the outlay minus the term premium. If the ILP's premium differs from the whole life's, ask for an ILP illustration at the same premium.
Use your current age as the starting age for all three, and run the model for 30 years.
Jun Hao's inputs, all examples made up for the exercise: outlay S$4,000 a year, starting age 34. Whole life sum assured S$200,000. ILP sum assured S$200,000, paying the higher of the sum assured and the account value. Term cover S$200,000 to age 65 for S$400 a year, leaving S$3,600 a year to invest.
Make one row for each checkpoint, at years 5, 10, 20 and 30, and these columns for each structure: cover on death, and cash value or portfolio value.
For whole life, take the guaranteed death benefit and the guaranteed surrender value from the illustration, and add the two projected totals in separate columns so you can see them without relying on them. For the ILP, take the account value and death benefit at both illustrated rates; there is no guaranteed value to use. For term plus investing, calculate the portfolio at three net returns with =FV(rate, years, -amount, 0, 1), as in lesson 3.4, Buy term and invest the rest, modelled honestly, and write the term cover beside it.
Jun Hao's portfolio values at 2.5%, 4.5% and 6.5% net came to about S$19,400, S$20,600 and S$21,800 at year 5; S$41,300, S$46,200 and S$51,700 at year 10; S$94,300, S$118,000 and S$148,900 at year 20; and S$162,000, S$229,500 and S$331,200 at year 30. Term cover is S$200,000 throughout, ending at 65.
His whole life values are those from lesson 3.2: guaranteed surrender values of S$6,000, S$22,000, S$55,000 and S$95,000, with S$200,000 guaranteed cover for life.
His ILP illustration, in the example, showed account values at the lower illustrated rate of S$8,000, S$26,000, S$60,000 and S$75,000, and at the higher rate S$9,000, S$32,000, S$95,000 and S$185,000. Cover stays at S$200,000 while the account is below that. At the lower rate the account grows more slowly in the third decade, as rising insurance charges from lesson 3.3 take a bigger share.
Plot the value columns on one line chart, years along the bottom. Use solid lines for figures that are guaranteed or are your own calculations, and dashed lines for projections at illustrated rates. The chart makes two things obvious that the table hides: how slowly the whole life guaranteed value climbs in the first ten years, and how wide the spread is between the low and high ILP lines.
Every comparison rests on assumptions. The useful question is which one, if it turned out differently, would flip your choice.
For term plus investing, find the net return at which the portfolio at year 30 equals each whole life figure. Jun Hao used goal seek in his spreadsheet. The portfolio matches the S$95,000 guaranteed value even at a slightly negative return, about minus 0.8% a year. It matches the S$150,000 lower projected total at about 2.0% net, and the S$190,000 higher total at about 3.4% net.
So term plus investing beats whole life's guarantee under almost any outcome, as long as he invests every year. Against the projected totals, it needs net returns of roughly 2% to 3.4% a year. Then there is behaviour: lesson 3.4 showed that investing only half the difference would leave him behind the guarantee.
For the ILP, the assumption is the fund return. At the lower rate, the ILP finishes behind the other two structures; at the higher rate, it finishes close to whole life's higher total, with no guarantee.
Jun Hao's note under his chart read, in full: "Need ends at 58, so cover past 65 has no value to me. Term plus investing is ahead unless net returns fall below about 2% or I stop investing. ILP is the most sensitive to returns and has no floor. Choice: term for the gap, keep investing S$3,600 a year by standing instruction. What would change it: a lifelong dependant, or failing to invest for two years running."
Yours will have your numbers and may reach a different conclusion. A finished model has one outlay and one starting age, a table at four checkpoints for three structures, a chart with guaranteed and projected values clearly marked, the break-even returns, and a note of two or three sentences naming your choice and the assumption that would change it.
Build the three-way model, chart the values over 30 years, and write a short note on which structure fits your need and why.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).