If you put this money in an endowment policy (or a variation of this policy), you get suffer a loss of 20% or more, depending on the expense and other charges taken away by the insurance company. These charges can reduce your yield by 2% or 2.5%.
Here are the figures:
Net Maturity Total
5.0% $198,000 Nil 0%
4.0% $179,000 $19,000 10%
3.0% $161,000 $37,000 19%
2.5% $153,000 $45,000 23%
Where did the 23% (ie $45,000) go? They are used to pay the following:
a) Commission to the agent
c) Expenses and profit of the insurance company
d) Mortality charges
How much does the mortality charge cost, if you buy Decreasing Term insurance to provide the same amount of protection?
The mortality charge should cost less than 2%. The remaining 21% is spent on high expenses and charges.
Lesson: An endowment policy provides good value if the mortality and expense charges is not more than 10% of the premium.