Tan Kin Lian's Blog: Benchmark for Life Insurance Policy

Tuesday, February 12, 2008

Benchmark for Life Insurance Policy

Here is a guide to measure if your life insurance policy gives good value to you.

Calculate the yield on the policy, using your annual premium and the cash value at the end of the premium payment period.

If you get a yield of 4% or higher, the policy gives good value. If it is lower than 3.5%, the policy does not give good value (i.e. high cost).

Here is the reasoning:

1. If you invest for 20 years or longer, you can get a return of 5% or more.
2. The yield on your life insurance policy is due to the expenses and the mortality cover.
3. A significant part of the reduction in yield is used to pay marketing expenses.
4. The reduction should not exceed 1.5%

If you buy Term insurance and invest the difference, you can get a net yield of more than 4%.

6 comments:

Carrot Cake said...: MR Tan ...

On the topic of Term insurance where yield is 0%, would you be able to advise what is "good value" on a term insurance. I'm looking for some benchmark price price/insured value.

thanks; February 12, 2008 10:59 AM
Anonymous said...: Mr. Tan, I agree with you that term insurance gives good value. But are you being responsible in asking people to buy term insurance? What if the term matures and the policyholder still needs coverage. He may not be able to get the coverage he wants because of poor health as he ages. Even if he is able to get coverage it will come at a higher cost because of his age.

So please be very careful when you recommend the public to buy only term insurance.

Personally I think that whole life gives the policy holder better control. He can decide when he wants to stop the coverage.The policy holder is at the driver seat. Term Insurance puts the insurance company at the driver seat.; February 12, 2008 3:33 PM
Anonymous said...: Hi Mr Tan, by cash value, do you mean Guaranteed or Non-guaranteed cash value?; February 12, 2008 8:44 PM
Anonymous said...: To 3.33pm. What if the term expires? if you have done the analysis so what it expires .That is the whole idea; IT WAS PLANNED TO EXPIRE..Term has better control. You decide everything from the start..because you know where you are heading; whole life the insurer decides, from coverage to return.Whole life is dangerous becuase you are likely not to have enough. Whole life takes a lot out of you that you have not enough money to buy enough of insurance.
About ill health, don't let insurance agents give you this crap that you cannot get insurance. If you have planned this should not happen.Insurance is NOT a cure all stuff. It is not end of the world if you don't insurance.It is not the only risk management technique. If it is ,then it is end of the world for millions of Singapore becuase all of them don't have enough.. Having insurance is about having enough of it. If you think that it is about owning some only then you are betraying your loved ones, your dependents. Insurance agents only want sell you some so that they can sell you more later but never enough. How else can they sell you if they have a new product? or if they have a contest promotion for incentive trips.They keep some gap for you so that they can fill the gap when they are short of money. Insurance selling is a bull.
If not why do you think Singaporeans are still GROSSLY UNDER INSURED.; February 14, 2008 2:20 PM
Khiat Han Hwee Adrian said...: There are proper guidelines in place to know your insurance numbers. The numbers are not plucked from the sky.

Go through a proper fact-finding with a qualified adviser.

Agents alone should not be blamed for Singaporeans being under-insured or they losing their CPF monies. There are many other factors that causes this phenomenal. No one can guarantee that the situation will be better if there are no Insurance advisers in Singapore?

Do you think that stock brokers alone be blamed for investors losing money in the stock market?; February 15, 2008 11:22 PM
Anonymous said...: You said a qualified adviser but how many are qualified? What is happening is due to the 90% who are not qualified. You mean the complaints in this blog is for the sake of complaining? Sure , it is difficult to get rid of these agents but it doesn't mean we stop trying and resign ourselves.; February 18, 2008 9:40 AM