Build a model that compares whole life, an ILP and term plus investing over 30 years at the same yearly outlay.
Jun Hao has three options in three separate documents: Ryan's whole life illustration, nine pages long, an ILP illustration of eleven pages, and his own term-plus-investing sums in a spreadsheet. Each uses its own assumptions and its own way of showing value, so he can't compare them at a glance.
The fix is to put all three on one sheet at the same yearly outlay and the same starting age. Whatever differences remain then come from how each product is structured. The exercise takes about 40 minutes. You need a whole life illustration and an ILP illustration for roughly the same sum assured, plus a term quote for that sum. These can be documents you've been given or samples from insurers' websites.
Pick one yearly outlay and use it for all three structures. This is usually the whole life premium. For term plus investing, the outlay is the term premium plus the amount you invest, so the amount invested is the outlay minus the term premium. If the ILP premium differs from the whole life premium, 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 figures, all invented for this exercise, are an outlay of S$4,000 a year and a starting age of 34. He uses S$200,000 cover for whole life, the ILP and term. The term cover runs to age 65 for S$400 a year, which leaves S$4,000 - S$400 = S$3,600 a year to invest. His ILP pays the higher of the S$200,000 sum assured and the account value.
Make one row for each checkpoint: years 5, 10, 20 and 30. For each structure, add columns for cover on death and for cash value or portfolio value. The inputs differ by structure:
Whole life: the guaranteed death benefit and guaranteed surrender value from the illustration, with the two projected totals in separate columns so you can see them without relying on them. ILP: the account value and the death benefit at both illustrated rates. An ILP has no guaranteed value. Term plus investing: the portfolio at three net returns, calculated with the spreadsheet FV function, with the term cover written beside it.
The formula is the one from Lesson 3.4, "Buy term and invest the rest, modelled honestly": =FV(rate, years, -amount, 0, 1). The final 1 means payments are made at the start of each year.
Jun Hao models net returns of 2.5%, 4.5% and 6.5%. His portfolio comes 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. The term cover stays at S$200,000 throughout and ends at 65.
His whole life values come from lesson 3.2. The guaranteed surrender values are S$6,000, S$22,000, S$55,000 and S$95,000 at years 5, 10, 20 and 30, and the guaranteed cover is S$200,000 for life.
From his ILP illustration, the account value at the lower illustrated rate is S$8,000, S$26,000, S$60,000 and S$75,000 at the four checkpoints. At the higher rate it is S$9,000, S$32,000, S$95,000 and S$185,000. Cover stays at the S$200,000 sum assured while the account value is below that. At the lower rate the account grows more slowly in the third decade, because rising insurance charges take a bigger share of it, as lesson 3.3 showed.
Plot the value columns on one line chart, with 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 whole life guaranteed value and the three term-plus-investing portfolios are solid; the whole life projected totals and both ILP lines are dashed.
The chart shows two things the table hides: how slowly the whole life guaranteed value climbs in the first ten years, and how wide the gap is between the low and high ILP lines.
Every comparison rests on assumptions, so the useful question is which assumption, if it turned out differently, would flip your choice.
For term plus investing, the key assumption is the net return. Find the break-even return: the net return at which the year-30 portfolio equals a given whole life figure. Goal seek in your spreadsheet does this. Jun Hao finds about minus 0.8% a year against the S$95,000 guaranteed value, a slightly negative return. Against the lower projected total of S$150,000 it is about 2.0% net, and against the higher projected total of S$190,000 it is about 3.4% net.
Term plus investing beats the whole life 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. Check the behavioural risk as well: Lesson 3.4 showed that investing only half the difference would leave Jun Hao behind the whole life guarantee.
For the ILP, the key assumption is the fund return, so compare the outcomes at the low and high rates. At the lower rate, the ILP finishes behind the other two structures. At the higher rate, it finishes close to whole life's higher projected total, but with no guarantee. The ILP is the structure most sensitive to returns, and it has no floor.
Finish with a note of two or three sentences naming your choice and the assumption that would change it. Jun Hao's note says his need ends at 58, so cover past 65 has no value to him. Term plus investing is ahead unless net returns fall below about 2% or he stops investing, and the ILP is the most sensitive to returns with no floor. He chooses term for the gap and keeps investing S$3,600 a year by standing instruction. What would change his choice is 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 and chart the values over 30 years. Then 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).