Question: My adviser advised me not to include the premium waiver due to high cost. What do you think?
Premium waivers are riders attached to a life policy so that upon certain insured event happening, the premium of the remaining premium period is waived.
And yes, premium waivers are generally expensive.
The premium waiver is actually a decreasing term. Here is an example to illustrate. I use the Manulife LifeReady as an example (note that this is not an endorsement. It’s just for illustration).
A juvenile whole life policy of $500,000 covering death, TPD and Early Critical Care Rider for a 3 year old child. The annual premium is $3210.68 for 25 years. If a premium waiver is added, the cost of the rider is $338.06 a year for 19 years assuming 43 years old father who is paying for the policy. The premium waiver covers death, TPD and critical illness of the payer.
The sum at risk of the premium waiver is 3210.68 * 24 years = $77,056.32 initially and decreases linearly over the next 24 years. Note that the initial sum at risk is not 3210.68 * 25 years because the first premium is already paid before the inception of the policy. The initial cost of insurance for the premium waiver is therefore 338.06/77056.32 * 1000 = $4.387 per $1000 sum assured. This increases over the years because the sum at risk decreases (due to the less premium waivable).
However, the cost of insurance for a term insurance covering $1m over the same period is $4.2 per $1000 sum assured for a 43 years old man. Note that this is a level term insurance, not decreasing. Therefore, the cost of insurance does not increase over time.
With holistic insurance plan, its better to use a level term to pay for all the family’s bills (including insurances) than to use a premium waiver rider.
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