Thursday, March 29, 2007

Pays 20 years for a whole life policy

Mr Tan,

Income has introduced a whole life policy where the premium is payable for 20 years only.

What is the difference, compared to a critical year policy?

I find the premium to be quite high for Income's policy.


My reply:

Under the Income policy, you are contratually required to pay the premium for 20 years only, and enjoy the coverage for the whole of life. It does not use the future rate of bonus to pay the future premium. In fact, the future bonus will add to the cash and protection value of the policy.

A "critical year" policy use the future bonus to pay the future premium. It makes a bold assumption on the future rate of bonus to have a shorter "critical year". This is not guaranteed.

Some people find the premium under the "limited payment" policy to be expensive. It could be more than twice of the premium under a whole life or living policy, where the premium is payable until age 85.

If you wish to enjoy a lower premium, you should take a whole life or living policy, with premium payable for life. You can stop the premium at any time, and convert the policy into a paid up policy for a reduced sum assured.

What's wrong with the "critical year" policy?

The insurance agent project a high rate of bonus and tells the customer that the premium will be self funding after x years. When the rate of bonus drops, the critical year is extended for many more years. The customer enjoys a lower premium rate, but is not guaranteed that the premium will actually stop at the critical year.

Conclusion: To enjoy a lower premium, take an ordinary whole life or living policy. To enjoy a "limited premium", be prepared to pay a higher premium.

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