Tuesday, April 29, 2008

Reduction in yield

Hello Mr. Tan,
I bought an Investment Linked Policy (ILP) in mid 2007. After reading this case study (http://tankinlian.blogspot.com/2008/04/high-cost-of-investment-linked-policy.html) , I feel I might've made a poor investment choice but I'm not sure how to get the figures. I just can't seem to find the net yield or the reduction in yield anywhere in my policy document.

The benefit illustration for my policy is listed below. I'll be very grateful if you can guide me and tell me if my ILP is too expensive:

End of Year: 20
Annual premium: $2160
Total premium: $43,200
Distribution cost: $1296
Protection value (guaranteed): $10,800
Total (include nonguaranteed CV): 5% > $60,200, 9% > $92,800
Cash Value (nonguaranteed): 5% > $60,200, 9% > $92,800
Effect of deduction: $23,010

I am really very lost. Thank you Mr Tan!


I suggest that you ask your insurance company to calculate for you the reduction in yield, based on an investment period of 10 and 20 years.

You can check it with my calculation below.
You invest $2160 a year. Assuming a gross yield of 5%, you get $60,200 at the end of 20 years (assuming a gross yield of 5%). The net yield (calculated from a financial calculator) is 3.3%. Reduction in yield is 1.7%.

Assuming a gross yield of 9%, you get $92,800 at the end of 20 years. The net yield (calculated from a financial calculator) is 7.4%. Reduction in yield is 1.6%.

If you invest in the STI ETF, the reduction in yield (i.e. expense ratio) is only 0.3%.

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