Wednesday, July 18, 2007

Cash back on a Term Policy

A life insurance company advertised a "cash back" if there is no claim under its term insurance plan.

This is how the plan works:

* the premium for the term insurance plan is, say $X a year
* for the cash back plan, the insurance company will charge $Y, which is probably charge 3 or 4 times of $X
* the difference between $Y and $X is invested to produce the cash back benefit to be paid on the end of the term.

Is this a good plan? You should consider the following:

* what is the return on the premium for the cash back benefit
* do you get a cash value, if you discontinue the plan during the term.

Lesson: Generally, it is better to avoid a "bundled" or "lock-in" product, unless the terms of the product are designed to be fair to the consumer.

5 comments:

Anonymous said...

The cash back is bad. It doesn't make sense to pay something to get back something. It defeats the concept of buy term and invest the rest. Instead
of buying cashback use the premium to invest you will get better return and more than the total cashback. This is one of those products that are out to deceive customers . The insurers today are running out of ideas. They conceive
products that look new but actually work against the buyers. That is why I insisted all along that you need a GOOD ADVISER and not an insurance saleman.This type of product is good for the pocket of agents. They will give all sort of
reasons to make you buy. To a qualified financial planner he can see straight away that it is a bad product and he wuill not recommend
it.He will recommend to invest the cashback rider premium.

Anonymous said...

I think its true that if you invest the cashback premium, you might get higher returns. However, such product might also be good for people who are risk averse and resistant towards investment.

Getting back what you have paid up is not that bad if the returns are decent compared to if the cashback premiums are not invested and left in the bank with miserable interests. Ultimately, as long as the product can suit the need of the consumer, why not?

I'm sure a good financial planner would do more research on the product and see if it is suitable for his clients' needs before jumping to conclusions.

Anonymous said...

There isn't much research you need to do. Imagine paying two times the term premium for cashback, a look at it will immediately tell you that paying so much to get half of it is not a good deal.On top of it,if you put it in money market fund giving 3% you almost get all the premium. What if you put into a balanced fund you get even more. Do your math and you see that it does not make any sense.
The next thing is that you incur an other set of premium which is more than the protection premium
If the client can afford he or she might as well buy a par plan without sacrificing coverage.

Anonymous said...

Well I guess there's always 2 sides to a coin, one man's meat, another man's poison :)

Par plans are not without their detractors either! So as long as the plans can suit the consumers' interests, its a good plan!

Anonymous said...

There is always a plan that suits the client better or best.

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