Protect against critical illness - buy term and invest the difference

I wish to give consumers another choice of how to protect against a critical illness: buy a 25 year term insurance (that also covers critical illness) and put your savings in a low cost fund.

Here is a hypothetical example (to illustrate the concept). You can use the actual figures relevant to your age.

Suppose you have to pay $3,000 a year ($250 a month) to get a critical illness policy covering $100,000. If you decide to take the risk on your own and to invest the annual savings of $3,000 to earn just 3% per annum. The savings will accumulate to $113,000 at the end of 25 years. The accumulate savings will be more than the amount payable under the critical illness policy!

You can buy term insurance (including cover for critical illness) for 25 years for a small premium. Actually, you only need a decreasing cover, as the reduction in each year is compensated by your annual savings. The cost of this cover can be quite low, probably around 5% of the premium. See this FAQ for indicative rates. (You have to take one-third of the rates for $100,000 cover and increase it by 50% to 100% to include critical illness.)

The premium that you put in a critical illness policy will also have a cash value. You have to find out the cash value at the end of 25 years and compare it with the amount that you can get by investing on your own. If the difference is small, it is all right to buy the critical illness policy. If the cash value is significantly lower, than it is better to avoid the critical illness policy.

If you are younger, you may pay a lower premium for the critical illness policy, but if you extend the calculation to a longer period (say 35 years), you will get the same conclusion, i.e. that you will be able to accumulate sufficient savings to get the full sum assured.

I have given hypothetical figures to illustrate the approach can consumers can take to make the right choice. You may need to find an adviser who is willing to give you the advice for a time-based fee, so that you get impartial advice.

To recap: Consider the approach of "buy term and invest the difference". Get the figures relevant to your actual situation. Find an adviser who is willing to give you impartial advice for a fee.

Tan Kin Lian