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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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{ 7 comments… read them below or add one }

La papillion February 13, 2012 at 11:33 am

Hi Derek,

I think you don’t have to cancel the policy. At your father’s age, the premiums to buy another insurance policy again could be quite exorbitant, so just carry on with it. So the next question is whether you should repay the loan immediately or keep it at status quo. I think to decide how best to use your 11k from your war chest, you have to ask yourself how much the interest of the loan drawn from the whole life is. Then ask yourself how much you can make if you invest the money in the market. I guess your answer will come from there :)

Reply

Derek Lim February 13, 2012 at 12:27 pm

Hi LP,

Jared reminded me about “Forget about “what a waste” thinking”. It drawn on me that the policy is actually in the red.

As of 11/01/2012, I have paid an estimated
$31,505 (premiums at the end of year 25) plus $15,600 (loan payment) =
$47,105 but my net surrender value is only $34,885.

I wouldn’t be so perplex if the policy covers critical illness or hospitalization but it covers only death and TPD (till age 65). As my Dad is no longer a major bread winner, I no longer require the death coverage. TPD (till age 65) may still be a good perk.

My agent cite an expample “If you should pawn the gold in exchange for cash on hand knowing you will incurr interest for such a facility, does it reduce the rate of return for your gold investment?…”

My issue is not so much on the reduce rate of returns but the exhobitant amount of interest I am paying. Although an interest of 6% p.a. is relatively low, it has compounded daily for more than 10years. It would seem that I will have paid more than double the intial loan amount due to the interest.

I am now thinking hard if I should carry on with the policy. Only then can I go on to the next question of paying my loan in full. Any views or comments are welcome.

I can imagine the look in my Dad’s face if it is proven true that I have paid more than double his inital loan amount.

Reply

Jared Seah February 13, 2012 at 8:36 pm

Hello Derek,

This is what I will retort to my agent:

“Then what’s the use of me exchanging my original cash for this gold “investment” in the first place? Peace of mind?”

Reply

Patrick See February 14, 2012 at 1:56 am

Hi,

I’ll try to assist from my understanding of risk management.

Without risk management, there won’t be a theory of financial impacts and hence a recommendation to address the financial impact. When your dad bought the policy, my assumption is that the insurance policy creates an instant asset in the event of the unexpected to address the financial impact for a potential loss of income.

After 25 years, is there a necessity to address the unexpected? Does he contribute to family income, now? Would there be a potential loss if the unexpected were to occur. Is there a necessity for risk management. Upon unanswering the above, you will know if the policy should be retained?

I’ll try to discuss the policy loan and feasibility depending on your response…

Cheers,
Patrick

Reply

Derek Lim February 14, 2012 at 7:10 pm

Hi Patrick,

No. My dad is not contributing to the family income. He is earning his own keep soley to support himself.

Hmm.. seems like a straight forward answer to cancel the policy.

Reply

Kelvin Song February 14, 2012 at 4:01 pm

Hi Derek

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).

- Derek, you mention the coverage is on death and TPD and not the normal 30 critical illness. You should get health insurance for him and with rider if expensive medical treatment is a main concern to you.

- You can consider use the surrender value (your dad portion) to put into any insurance bonds fund that pay up to 4% distribution annually at same time giving limited but additional coverage on death and TPD. And you can keep back your capital or all give it to him if you wish.

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?

- If you decide to keep it, though it is not 6% profit returns, you actually save 6% p.a. And according to you, it earns around 3%p.a. onwards. Not sure how big is your “war chest”, if one has excess lump sum, in a way you actually diversify your investment, low but stable returns with protection on dad.

- Problem might arise when you need the cash from the policy, e.g. car loan etc. Going to take a loan from the policy again? If you decide to pay up for your dad, its better to treat it like giving it to him. Question: Your cashflow ok?

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.

- Another way probably you can pay up the whole policy and your dad $100 monthly pay to you instead. Mutual agreement before proceed to pay up for him?

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.

- I dun understand.. you mean you have another loan that is around the same amount but of higher interest? Then you can actually max the loan from your dad policy (~20k+ more?) to pay for the balance of higher interest loan and repay GE instead.

Reply

Derek Lim February 14, 2012 at 7:31 pm

Hi Kelvin,

- Derek, you mention the coverage is on death and TPD and not the normal 30 critical illness. You should get health insurance for him and with rider if expensive medical treatment is a main concern to you.

*Yep, I already have a CI and Shield plan for my dad. This policy has its uses 25years ago but seems redundant now.

- You can consider use the surrender value (your dad portion) to put into any insurance bonds fund that pay up to 4% distribution annually at same time giving limited but additional coverage on death and TPD. And you can keep back your capital or all give it to him if you wish.

*That’s something new. I know that insurance bonds does provide a limited death coverage but I am unaware that it covers TPD too.

- If you decide to keep it, though it is not 6% profit returns, you actually save 6% p.a. And according to you, it earns around 3%p.a. onwards. Not sure how big is your “war chest”, if one has excess lump sum, in a way you actually diversify your investment, low but stable returns with protection on dad.

*I don’t know if you can consider it as low as stable returns. It would have if not for the huge interest I am paying. It is the interest that cause my policy to be in the red.

- Problem might arise when you need the cash from the policy, e.g. car loan etc. Going to take a loan from the policy again? If you decide to pay up for your dad, its better to treat it like giving it to him. Question: Your cashflow ok?

*I would think my cash loan is ok and I have no intention in allowing my dad to take another loan from his policy.

- Another way probably you can pay up the whole policy and your dad $100 monthly pay to you instead. Mutual agreement before proceed to pay up for him?

*It can be arranged provided I see value in carrying on with the policy. Else $100/mth can be spent in another product.

- I dun understand.. you mean you have another loan that is around the same amount but of higher interest? Then you can actually max the loan from your dad policy (~20k+ more?) to pay for the balance of higher interest loan and repay GE instead.

*Not another loan but I will have to pay another $1.3K interest based on my existing loan making it a total of $5.8K interest on a $10K loan.

Reply

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