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My Decision On My Dad’s Whole Life Insurance And Policy Loan

by Derek Lim on February 12, 2012

A brief history on my Dad’s Whole Life (WL) policy with GE:-
He bought a Whole Life with CRB from GE with a coverage of S$50K in January 1987. Current premium is $315.05 per quarter or S$105.02 a month. I believe his premium used to be slightly higher because of a “Comprehensive ACC ben rider with RCC” which I have since cancelled and replaced with a stand-alone accident plan in 2007. After paying for over two decades, here are the numbers:

 

 

 

Except for the guarantee surrender value (SV), the above numbers are an estimate. The numbers are nothing fantastic. Even if I include the non guarantee SV, the CAGR is still only 1.52% but at least the policy is in the black. For good measure, I decided to use the projected non guarantee SV after 56 years to calculate the CAGR and I got a whopping 1.80%!

There are naturally some flaws. This is after all a Whole Life Insurance and not a savings plan. Hence, I should be looking at the angle of coverage. WL plans only break even after 10years or more, hence using CAGR may not be wise. The biggest flaw however is a policy loan which my Dad took many years ago.  He can’t recall when and the amount borrowed – I will estimate a loan of about S$10K about 12-15years ago. The amount has snowballed to over $22K when I reviewed his policy in 2007. I have three options then: cancel the policy, leave it or service the loan. I opted to service the loan, hopping that the policy can be used as my Dad’s emergency fund.

Fast forward to 2012 and I began to question my earlier decision.

I have been making monthly payments of S$400 on top of the quarterly premiums for the past 3+yrs. I have about 32 months remaining, which means I would have spent 6yrs paying for the entire loan.

I am now faced with more questions:

1)      Terminate the policy.

My insurance agent advised against it because WL bonus will increase substantially during the later years. It will be a waste to cancel it after 25years. I tend to agree because I am not I am not looking at growing this money as much as possible but as a emergency fund in case my Dad require expensive medical treatment. As much as I would like to use it as his retirement fund, I think it is not possible. Even if I were to terminate the policy, I see no product that I can put in to earn about 3% p.a (based on projected SV).

2)      Stop paying the loan.

No one in the right mind will do this. The amount will only snowball and I would have wasted my money for the last 2.5years.

3)      Stop paying the premium.

There seem to be a clause that my insurance can still be inforce even if I stop paying the premiums. Of course, the benefit will be based at that point of time when my premiums ceased. Of course, the loan will still have to be serviced.

4)      Pay up the loan in full.

The loan amount is now a manageable S$11K. Although I can pay the amount in full, I will have to use it from my “war chest”.

The main opportunity cost I am weighing now is whether there will be an investment opportunity in the next 32 months? To put it simply, will there be a recession where stocks plunge?

5)      Pay up the loan and terminate the policy.

This is a whacky idea that just pop up. I don’t think further thought into this is warranted.

I notice an interesting result. After the 28th year, the returns start to drop and in the 67th year, the returns is just 0.4%. I can’t seem to figure out why but I can only assume that no issuer will be foolish enough to maintain the same rate of returns as your policy value compound annually.

I think I will remain status quo for now (until the loan amount is fully paid up) because:

I.            It forces my Dad to put aside a sum of money $100 every month for his premium which he would otherwise have spent. Also, I don’t know of any product now that can match the same returns as the policy.

II.            I am anticipating a buying opportunity within this 2.5years and an interest of $1.3K isn’t that much as compared to the over $4.5K interest I paid over the almost similar period.

Any thoughts on my decision?


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