Thursday, April 17, 2008

Demand a net yield of 3% on your regular savings

If you pay premium towards a "savings-type" life insurance policy, you should demand a net yield of 3% for 10 years. These products include endowment, whole life, investment-linked, critical illness and their variations, such as limited premium and cash back.

If you save $100 a month for 10 years, the life insurance policy must give you a net return of at least $13,900. Your total savings is $12,000. The gain is $1,900 (i.e 15.8% on $12,000). If you are not getting this gain of 15.8% on the total savings, you should avoid the life insurance policy.

If you save $300 a month, you should check if the cash value at the end of 10 years is at least $13,900 X 3 = $41,700.

Most life insurance products give you a poor yield, as a large portion of your premium is used to pay commission to the agent and the agency manager. The true cost of the life insurance protection is a small proportion of the premium that is spend in marketing and sales.

Lesson: Demand a net yield of 3% on your savings. Look at the benefit illustration on your life insurance policy. Look at the figures for 10 years duration. Compare the cash value with the total premiums. If you do not get the gain of 15.8%, do not buy the life insurance policy.
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4 comments:

Anonymous said...

Hi Mr Tan,

For the cash value, do I look at the guaranteed value only or do I add the projected investment yield as well because by looking only at the guaranteed value, I have yet to come across any plans whose guaranteed value is more than the total premium paid after 10/20 yrs.

Rgds
Derek

April 17, 2008 9:00 PM
Anonymous said...

During Mr. Tan's time the returns were better. Today if you take a look at Income's new products they are terrible.The annual bonuses were better and if one were to surrender in the interim the cash value was high.
Now you have to hold till the very end before you get a paltry return. You can't afford even to stop at the second last payment term you will lose a lot, like the revosave. The new products hold to ransom to make sure you stay with the term, the long lock in. This is like a life sentence. Similarly like whole life products you have to hold for very long term. It is designed to ensure the company continues to get its revenue for life and to reward the insurance agents for their 'skill' to hoodwink the customers to buy this product.
With inflation as high as 6.6% whole life and endowment products are sure loss. Why buy? it is either customers are suckers or agents are blood suckers.

April 18, 2008 8:24 PM
Anonymous said...

Hi,
May i know why you peg it at 3% for 10 years ? i am curious about the selection of these 2 values.

April 20, 2008 8:57 PM
Anonymous said...

Can we also demand the bank today to pay at least 3% for our savings?

If not, why not?

April 23, 2008 10:23 PM

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