Critical Illness Policy for $250,000

Insurance agents like to their clients to insure $250,000 for a "whole life" critical illness policy. The tell the clients that you need $250,000 to provide loss of income for 10 years. Why?

The answer: About 18 months of premium goes to pay the commission to the agent and his managers, and the expenses and profit of the insurance company. To insure $250,000, the monthly premium is $500 for a person at age 30. About $9,000 is taken away from your savings to pay the various parties.

If the monthly premium of $500 is invested to earn 5% per annum, it will accumulate to $250,000 within 23 years. You can be 100% sure of getting this sum in 23 years (based on 5% investment return). Compared to this certainty, the proportion of people likely to suffer a critical illness within 23 years (and make a claim of $250,000) is between 5% to 10%.

If you buy the "whole life" critical illness policy, how much is the cash value at the end of 23 years? My estimate is $180,000 (but you can check it out). The cost to you over 23 years is a staggering $70,000.

If you wish to insure for critical illness, take a low cost insurance (like Term insurance but extend to include critical illness) to cover 25 years only. The premium is quite small.

Note: The charges under the Living policy from NTUC Income is lower than the market, so the cost is lower than the example shown above. But, it is still quite high, compared to the "Buy low cost insurance and invest the difference".