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
Yield charges
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
b) Advertising
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.
5 comments:
mr tan, is it possible for an insurance company to offer an endowment policy with low expense charge, so that the return can be 4% or better? i do not mind giving some of the return, as long as it is reasonable, and i still get a good return.
mr tan, i have been studying your figures closely. if i save $500 over 20 years, my total saving is $120,000.
the return based on $198,000 is $78,000. if the charges take away $45,000, then i am left with a return of only $33,000.
why should the charges take away nearly 60% of my hard earned return for 20 years. this is daylight robbery!
The return of endowment depends on the return on the life fund.To get 4% is very difficult because the high expenses and low interest rate of the long term bond. In fact the large part of endowment's returns depends on the return of life fund now but unfortunately a small portion of your premium is allocated in there together with the rest of other people's premium and invested in the same asset mix.
So it is difficult to get 4% or higher. No distinction of risk tolerance and it is one size fits all portfolio. This is the disadvantage
One good reason why you should not invest in endowment. It is better to invest on your own and you have full control. Endowment? no control.
Mr Tan, where can I get yield of 5% if I save $500 a month? Thanks.
If you are investing for the next 20 years, it is likely that you will get a return of 5% per annum on an investment fund. The gross return on the life insurance fund should also give you 5% per annum (my estimate), before deducting expenses.
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