## Monday, February 11, 2008

### Whole life, premium payable for 25 years

Dear Mr. Tan

I have a \$50,000 whole life insurance plan with annual premium of \$1,000 payable for 25 years. After 25 years, I do not need to pay any more premium, but remain insured. The cash value at the end of 25 years is \$30,900 (of which about two-thirds are guaranteed). Did I get a good deal?

I have already paid two years' premium. Should I continue the policy?

If you pay \$1,000 a year for 25 years and get back a cash value of \$30,900, the return is 1.6% p.a.

Alternatively, you can spend \$100 a year on Term insurance and get a higher coverage. If you invest \$900 a year for 25 years to earn 4.5% p.a. (not guaranteed, but quite conservative), you will get back \$41,900; If you earn 4%, you will get back \$39,000.

http://www.tankinlian.com/faq/savings.html

If you write off the loss of 2 years premium (which you have already paid), the yield on \$1,000 for 23 years with a return of \$30,900 is 2.4%. It is still low, but probably all right. I suggest that you keep this policy.

Lesson: Avoid high cost life insurance, where a large part of your premium is taken away to pay charges. If you are already committed, it is better to keep the policy.

#### 1 comment:

Anonymous said...

Dear Mr Tan:

I do not have a good background in mathematics.Pls kindly show us how to calculate the return p.a in the above calculation.Hope you can share your formula with your blog readers.
Thank you.