Term With Return of Premium
If you intend to leave behind US$1,000,000 for your loved ones or estate, how many ways you can do it?
Method 1: Save very hard
Method 2: Save and invest monthly in a regular saving plan (RSP)
Method 3: Buy a investment property of US$1,000,000
Method 4: Buy a level term insurance that refund you the total premiums
Method 1: Save very hard
- How much you need to save per month to save US$1,000,000 in 30 years?
- The answer: US$2,778 or S$3,473 per month
- In the event if you walk out of the picture before 30 years, your loved ones get less than US$1,000,000. If you manage to save for 10 years, your estate gets US$333,360.
- If they can have US$1,000,000 and invest it at 5% p.a. it could provide them with US$50,000 p.a. interest for their living expenses. At least the financial burden is taken care of while they take time to overcome their emotional loss!
Method 2: Save and invest monthly in a regular saving plan (RSP)
- How much you need to save and invest per month in order to have US$1,000,000 in 30 years?
- It depends on your risk profile, time horizon and expected rate of investment returns per annum, etc.
- Let assume that the time horizon is 30 years and make assumptions that the expected rate of investment returns per annum for conservative risk profile is 3% p.a., moderate risk profile is 5% and aggressive risk profile is 8%.
- For someone with conservative risk profile with expected investment returns of 3% p.a., you need to save S$2,189 per month and invest this amount in a RSP for 30 years.
- For someone with moderate risk profile with expected investment returns of 5% p.a., you need to save S$1,568 per month and invest this amount in a RSP for 30 years.
- For someone with aggressive risk profile with expected investment returns of 8% p.a., you need to save S$920 per month and invest this amount in a RSP for 30 years.
- Your investment returns are not guaranteed and it depends on the markets.
Method 3: Buy a investment property of US$1,000,000
- To invest in private property, you need to have 20% to 40% Cash/CPF for down payment. Assuming you are buying your second property, you can take a loan of 80% if you have fully paid your first loan. If not, you can only take 60%.
- The initial cash outlay is high. There are other costs like commission to agent, stamp duty fees, interest costs for borrowing from bank, renovation costs, furnishing costs, mortgage insurance costs, etc.
- The upsides are capital appreciation of your property and rental income.
- The downside is loss of income during an economic downturn. You may have problem servicing your loans and your bank may request for topping up of your monthly instalment. If you can't top up, your bank can potentially force sell your property and make you a bankrupt.
Method 4: Buy a level term insurance that refund you the total premiums
- A cost effective way of protecting your loved ones with a guaranteed pay-out of US$1,000,000 is to buy a level term insurance on your life. If you are prepared to pay a bit more premiums, you can get a level term insurance that refund you the total premiums at the end of 30 years. By then, your children are grown up or your loved ones can take care of themselves and you can have your money back as part of your retirement fund. You actually kill two birds with one stone!