1. I have paid the premiums under my life insurance policy for more than 10 years. The cash value is still less than the total premiums paid. Why does the policy give such a poor yield?
The insurance company has paid a high rate of commission to the agent in selling the policy to you. The commission and other marketing expenses take up about 24 months of your premium (for most cases). This money has been spent and is taken away from your savings.
The company has also incurred cost in providing the life insurance cover to you under the policy. This cost is relatively small. The company has also taken away some of your premiums as a profit margin for their shareholders.
After deducting the charges, the balance of the premium that is invested is quite small in the initial years.
For a company with high expenses, it usually takes more than ten years for the policy to reach its break-even point, i.e. the cash value is more than the premiums paid. If the expenses are low, the break-even point may be reached before ten years.
2. I have an existing life insurance policy. It provides a poor return on my premiums. Should I continue to keep this policy?
You should as the insurance company to quote the following figures for you:
cash value, if you surrender the policy now
cash value, if you surrender the policy in 5 years time
premium payable for the next 5 years
You can compute the yield for the next five years. If the yield is more than 3%, it is better to keep the policy, as you enjoy the life insurance cover and still get a modest yield. You can get a fairly satisfactory yield, as you have already incurred the high charges during the earlier years of the policy.
If it is less than 3%, you can consider terminating the policy. You can take up a term insurance policy and invest the difference in premium in a low cost investment fund.
3. Should I continue with my investment-linked policy? Does it give good value?
You have to study the charges under the investment-linked policy. Some of the charges are:
the spread taken from each premium that is invested
the expense ratio taken from the fund
additional administrative fee charged on the policy
mortality charges
distribution cost
The distribution cost is usually hidden from the policyholder. It is the difference between the premium that you pay and the amount that is invested for you. This difference is used to pay commission to the agent and marketing expenses. It is usually taken from your policy during the initial years. After this initial period, here is no more distribution cost.
You have to compare these charges with the charges for similar plans in the market. Usually, if the distribution cost has already been fully deducted, it is better for you to keep the investment-linked policy.
4. I have retired from work. I find it a burden to continue paying the premium under my life insurance policy. Some policies require me to pay premiums for my entire life. What should I do?
You have the following options for these policies:
· continue to pay the premium using your past savings
· stop paying premium, and enjoy a lower coverage under the paid-up policy
· terminate the policy and receive its cash value
If you have sufficient savings, you can study the yield over the next five years, to decide if you should continue the policy. You can adopt the approach mentioned in paragraph 1 above.
If you do not have past savings, you have to consider the paid-up policy or to cancel the policy entirely for its cash value.
I refer to question #4.
ReplyDeleteI have a similar case of an old man made to buy revosave. I wonder how this man is going to pay the monthly premium or yearly without income but using his saving to pay for it.
Imagine he pays XX amount and gets only about 60% as refund.I find this so ridiculous. Whatever reason was this product revosave bought was an obvious mis-selling by the agent.
I have advised him to take it to CASE or Fidrec for investigation. I believe it was not only mis-selling but the product was misrepresented. I wonder who is this conscience less agent. BTW she is a female.
Mr. Tan,
ReplyDeleteI refer to Question 3.
When you said yield if more than 3%.Are you refering to yearly bonus return over yearly premium ?
Here is a rough way to calculate the yield:
ReplyDeleteCash value now, say $5,000
Premium for next 5 years, say $6000
Cash value in 5 years time, say $12,000 (including non-guaranteed bonus)
Gain = $1,000
Average amount invested = $5,000 plus 1/2 of $6,000 = $8,000
Return = $1,000/$8,000/5 years = 2.5% p.a.
If you use a financial calculator, the actual return will be slightly different.
I agree with Anonymous 12.46am.
ReplyDeleteSome of these unscrupulous agents selling to old people. THese agents are no diiferennt from banks. Old people are easy victims of insurance agents and of all agents i don't expect that from ntuc agents. What has happened? Ntuc agents are getting
greedy and resort to unethical means now. It is really sad.Worse their supervisors don't stop and management
also close eyes.
Question 4
ReplyDeleteLet the next generation "invest" by paying for the premium.
The only certainty in life is death. So why surrender when by paying on, the next generation can gain more?
Leave it to the next generation to invest on the old man.
This is not a need, is it? It is like buying a second hand policy as investment. The buyer may wish the insured die early to get better return. There is a moral question.
ReplyDeleteOn the other hand before you take the leap study the figures. It may not be worthwhile. The agents don't understand or interpret the number illustration .Get an expert to help you.
The certainty of death is for the rich who want to leave a legacy.
I have an Income Protection Policy since 1992, it gave me quite good values.
ReplyDeleteWell, when come to old age, it is not a matter of moral question.
It is a matter of leaving behind an inheritance. If I can get a death payout of good value to leave behind, why should I benefit the insurer by surrendering then.
So it is still good to leave it to the next generation if values are good then.
It is like traded Endowment, why not if it can benefit own next generation.