本文发表在 rolia.net 枫下论坛Comparing "Buy term and invest difference" with whole life products are just non-sense.
Whole life is completely risk free, the return is risk free, the premium is guaranteed, and the payoff is guaranteed. If you have to view it, you can see whole life as a GIC.
What about "Buy term and invest difference"? The return is not guaranteed. There is a risk component built in. Most of you agree that index fund has superior return in history. Then why don't we all invest money in mutual funds? But why is GIC still a big market?
In investing, you cannot just compare whole life and GIC products against index fund or any other fund you mentioned. One is risk-free guaranteed product and the other one is a risky product. It's just like you are comparing GIC and index fund. Even a moron knows that index fund has a higher return than GIC. But it comes with risk.
Many people, without advanced financial knowledge, often ignore many risks in investment. However, from a portfolio management view, especially from a highly regulated insurance company's portfolio management view, investing in index fund and stock market comes with a much higher cost. We have to hold extra 15% of capitals (MCCSR requirements for those who have heard of it) in investing in stock market. But only 0.5% is needed in safe product like Gov't bond, with similar return to GIC. What that means if we are to invest 100 dollars in stock market or fund related to stock market, we have to hold 15 dollars in reserve to cover various risk associated with them. So the cost of capital (or internal rate of return) for investing in stock market is much higher than elsewhere. It is one reason why insurance companies have low exposure to stock market (<10%). Eg, if your 100 dollar growth to 105 dollar, you need to discounted as (105+15)/(100+15). This is not just for insurance company. The banks have similar requirements as well.
What I meant is you need to have a balanced portfolio. Some with high risk, some with medium, and some with guaranteed. Blindly follow "Buy term, invest difference" is just flaw. So several benefits of whole life are
1. It forced you to save.
2. It is tax exempt (BIG BENEFIT for those earned 65K and above).
3. It actually has the highest benefit payout ratio.
4. Its guaranteed rate is lower than comparable GIC and gov't bonds are because the insurers need to cover the lost from early death (Ie, mortality risk, what happen if you died just one year from now?)
For those who think agents get more commission in whole life and UL is just a mistake. It it true that in dollar term per contract that they get more commission in selling a whole life policy. But it is false in percentage term. In fact, the commission is the highest in percentage term for term insurance since it is quite cheap that the insurers have to give more incentive to the agents to sell. To give you a insider view, the benefit payout ratio (loss ratio, the amount of benefits payout over premium collected in percentage term) in whole life, in some company, is 40% higher than term life. And in fact, in all the traditional life insurance products, term life carries the lowest loss ratio and the highest benefit/expense ratio.更多精彩文章及讨论，请光临枫下论坛 rolia.net