Whole life premium payable for 10 years

Dear Mr. Tan,

I have been offered the following product:

Plan: Whole life, premium payable for 10 years only
My age: 37
Sum insured: $25,000
Monthly premium: $100
Estimated cash value at end of 10 years: 9,800
Estimated cash value at age 65: $29,000

Is this good for me?

REPLY:

Here is another alternative, ie buy Term and invest the difference:

a) Buy 10 year Term insurance to cover $25,000: annual premium of $40.
b) Invest the balance ($100 X 12 - 40) over 10 years to earn 4% per annum: estimated $13,900.
c) Keep the $13,900 invested at 4% for another 18 years to age 65: estimated $28,100.

The projected cash value of the whole life policy after 10 years ($9800) is much lower than the alternative ($13,900).

The projected cash value at age 65 (i.e. $29,000) looks quite attractive, compared to the alternative ($28,100). However, you have to find out what portion is guaranteed and what portion is non-guaranteed.

If you compare the projected cash value after 10 years ($9,800) with the cash value after 28 years ($29,000), the insurance company is assuming a yield of 6.2% over the 18 years. I find this projection to be too optimistic.

I have used 4% to project the yield on the investment fund. This is not guaranteed, but is quite conservative. There is a good chance that you can earn a higher return, say 5% p.a. This will give much better projected values.

I prefer to buy Term and invest the difference in a low cost, diversified fund.

Read these FAQ:
http://www.tankinlian.com/faq/term.html
http://www.tankinlian.com/faq/savings.html

All the best in your decision.