Hi Mr Tan,
You posted a story about a whole life policy that gives a return of 1% p.a. over the next 10 years. Why is the return so low? How does the cash payment every 5 years caused the return to be lower?
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REPLY:
Normally, a basic whole life policy should give a return of about 2% p.a. (after paying for the cost of life insurance and the sales charges). If you add a cash payment every 5 years, it reduces the return by about 1% p.a. Here is the reason.
To fund the cash payment, you have to pay an additional premium. The yield on this additional payment should be about 3% p.a. However, after deducting the high commission paid to the agent, you will get a negative return on this additional premium. This reduces the return on the basic whole life policy.
The agent likes to sell this product to you. He or she can earn the high commission on this additional premium as well. But, it is not in the interest of the consumer.
I hope that insurance agents or advisers can act ethically and offer products that give good value to their clients.
Could you demonstrate how you arrive at the 1% return mathematically? It will be good to learn how to calculate this.
ReplyDeleteThe details are in my posting below.
ReplyDeleteIf such policies are bad for the consumers, why does NTUC Income, which claims to work in the interest of their policy holders, continue to offer the Anticipation Policy which has a cash payout every 3 years? Looks like a case of saying one thing but doing another.
ReplyDeleteDo you mean that there is nothing good about a whole life policy? If so, the insurance company should act ethically and discontinue this type of product.
ReplyDeleteWhole life policies do have their good points, especially those with critical illness cover. It is only the policies with cash back that should be discontinued.
ReplyDelete