Monday, May 25, 2015

CPF versus Whole Life Insurance (for kids)

"Why not putting monies into the kid CPF account instead of Whole Life Insurance ? ", a reader asked.
This is an interesting figure to find out. As I have committed S$6,602 payment for 5 years into my kid whole life insurance, it would be good to know what if these monies are placed in the kid CPF SA account instead. What are the differences at the end?
Below table are generated by placing the same amount of S$6,602 per year for the first 5 years only. To include the MA of S$3,000 from the government is to see when the (SA+MA) will hit the first S$60,000. It is because the interest given for the first S$60,000 is 5%, thereafter it will be 4%. In this case, it will happen at the age of 14.
So, by the age of 65, these amount of monies (S$6,602 x 5 = S$33,010) will turn out to be S$435,006 in the CPF SA account.
If you look at the insurance policy, the surrender value by the age of 65 will be S$368,309.
Although one can argue these numbers are non-guarantee value (which is correct) but this insurance company, Tokio Marine, never fails to pay the declared non-guarantee surrender value for the past 67 years (since year 1948), so it is very credible to claim that you will receive this amount of declared value, nothing more and nothing less.
To make the comparison complete, I also include the death benefit by the age of 65. The value is S$654,682.
In summary, if you compare the surrender value, you will see you have a shortfall of S$66,697 compared to the CPF returns in SA account.
Nevertheless, whole life insurance has additional layer of benefit (in this case, it also includes critical illness riders), which is an insurance coverage for the entire life span and in this example, from age 1 to age 65 as comparison.
It is now my ultimate goal to ensure that my kid will have the same opinion as me that this shall be a legacy plan. It shall not be surrendered for the sake of his own usage but passing on to the next generation. That's why it is called Legacy Plan.
For my interest to see what happen from age 66 to age 85. SGD 1 million dollar just appeared. The power of compound interest.

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