I took down this blog post after it was put up for only slightly more than an hour at 8am this morning. In that short period of time, it received about 400 pageviews and several comments from readers, a couple of which were more than unpleasant. After deleting the blog post, I received a few comments and PMs from readers in FB who missed reading it.
Often, we are presented with charts and tables by advisers which do not show the complete picture. I am not claiming that I am presenting the complete picture here. I most certainly am not but I believe I have illustrated quite simply in the blog post why ILPs are not cost efficient for consumers. They are overpriced life insurance products and as investment tools to help grow our wealth, they are mediocre at best.
I am quite mindful of my blog's louder voice and the potential backlash I might be subjected to. Despite what some people might think, I am not crazy. I wouldn't want to get into trouble. However, sometimes, we just have to say it as it is and this is what AK is known for doing. Right?
Feel free to disagree but please be civil about it.
However, if you think that what I have done is worthwhile and if you agree that more people should know about this, please share this with your family and friends.
So, come what may, resurrected, here it is:
A reader told me that his classmate from school who is trying to get him to buy an ILP told him that, basically, after 20 years, he will break even on that ILP. It means that he would have received 20 years of life insurance for FREE! Sounds really attractive when the word FREE is thrown in, doesn't it?
$1,000,000 life insurance coverage with a premium of $13,000 a year. That is quite a bit of money.
Anyway, because I have been blogging so much about buying term life insurance lately, the reader was quite torn as to what should he do.
So, my simple brain churned out some simple numbers.
If he were to buy a $1,000,000 term life insurance instead, he would pay less than $2,000 a year, being in his early 30s, for the next 20 years. That means a savings of more than $11,000 a year.
For ease of calculation (i.e. my ease of calculation), let us assume that the term life insurance premium is $3,000 a year and that the savings is only $10,000 a year. Yah, only $10,000.
|It is time for some magic!|
Now, assuming that the reader were to invest the yearly savings of $10,000 into stocks of fundamentally sound businesses that have a dividend yield of 5%, he would, in 20 years, receive in dividends, from year 1 to year 20, the following:
Total pocket money (nothing reinvested) collected in 20 years: $105,000.
$105,000 is more than enough to pay for 20 years of premiums for a $1,000,000 term life insurance! In fact, it is about twice as much as the hypothetical premiums and probably thrice as much as the real premiums! So, isn't this a FREE life insurance as well? In fact, it is better than FREE since there is a lot of money leftover!
Chances are that the $200,000 worth of investment would still be intact 20 years later and it would continue to generate income year after year. That is $10,000 a year, year after year.
I know this is a simplistic example but it makes the whole matter of why an ILP is not a good choice so much easier to see.
I believe that the assumption of a static 5% yield on investment is not over the top either. In fact, it could be quite unrealistic, in a good way.
Anyway, I believe I created another problem for the reader after our chat.
"thanks, and i having some headaches how to reject my friend now..."
Oh, dear. Sorry. -.-"
1. Term life insurance: Some lessons.
2. Term life insurance: Why buy term?
3. Whole life insurance and investing.
4. Investing for income: An important element.
5. The best insurance to have in life.