The Effect of Deduction is as follows:
Total Cash Value Effect of
Premium Gtd N-Gtd Total Deduction
10 yr $15,980 $14,050 $1,523 $15,573 $5,830
20 yr $15,980 $18,400 $6,887 $25,287 $10,416
30 yr $15,980 $23,700 $15,723 $39,423 $20,132
After paying the premium for 10 years, the cash value is still less than the premiums paid. The effect of deduction is about $5,830, This is the money that could have been earned by investing the premiums.
The effect of deduction over 30 years is about $20,132. If the parent had bought a level term assurance for the child for 30 years, the total premiums plus interest would be about $3,500. This is cheaper than the $20,132 (i.e. "effect of deduction") charged under the life insurance policy.
Read this FAQ:
http://www.tankinlian.com/faq/benchmark.html
5 comments:
After paying the premium for 10 years, the cash value is still less than the premiums paid. The effect of deduction is about $5,830, This is the money that could have been earned by investing the premiums.
- You assume the policyholder is determined to prevent the policy from lapsing at all costs. (first 10 years of premiums for this policy, and/or 30 years of the whole level premium term plan)
But little things like personal catastrophies may happen in life that might cause policyholder to stop paying premium at certain point(s) in time, the cash value is there to prevent it from lapsing, but not be used as full collateral, when it looks like this policy is to be insured for a person from age 19 onwards to whole life.
So Term plan might lapse whenever you don't pay (after grace period) at any point of 30 years, but for this policy, as long as you pay for whole 10 years (without lapsing, not to mention comparatively harder to lapse, due to cash value).
- However at this age (19-49), Term policy does look more attractive cost-wise. Even if one do lapse, still pretty easy to find another term/whole life to replace/supplement it.
- But this is a whole life policy, so you shouldn't compare with a premium level term insurance for a child for 30 years when this whole life policy can last more than 40 years (or even 50 years instead of just 30 years? Look long term :)
- You might need to explain more than just effect of deduction = opportunity costs.
- You might want to show some concrete and sound charts/illustrations (using expected interests rates) if you buy a level premium term plan for up to (perhaps) age 70 (realistically speaking), and the costs for premium paid as compared to buying a whole life plan, and calculate price difference which can be used as an opportunity for investments.
Instead of just saying this is cheaper, that is cheaper, investing the difference etc.
Here is my reply to Tatos. The adviser should tell the client that he or she has two options, to buy term insurance or to buy a whole life plan so that the cash value can prevent the policy from lapsing.
The adviser should also the "effect of deduction". If the client likes to bear the cost and enjoy the benefit of "avoid lapsing", it is all right. It is the customer's choice.
My purpose is to tell the public that there is a low cost choice. I will let them decide what is best.
I do not need any complicated charts to explain this point.
"So Term plan might lapse whenever you don't pay (after grace period) at any point of 30 years, but for this policy, as long as you pay for whole 10 years (without lapsing, not to mention comparatively harder to lapse, due to cash value)."
this argument is, unfortunately, get mentioned way too often. if for some reason you are unable to pay the premium for your term life policy, simply liquidate a portion of your investment, and use the money to pay it off.
"But this is a whole life policy, so you shouldn't compare with a premium level term insurance for a child for 30 years when this whole life policy can last more than 40 years (or even 50 years instead of just 30 years? Look long term :)"
why not? it is one of the fault of whole life policy that we are trying to address by buying term (and investing the difference): we'd like to avoid mortality charges when we don't actually need life insurance.
"You might want to show some concrete and sound charts/illustrations (using expected interests rates) if you buy a level premium term plan for up to (perhaps) age 70 (realistically speaking)"
this is, clearly, absolutely unrealistic. by the time you reach 70, it is highly likely that:
1. you no longer have to financially support your kids, 2. you have saving worth multiple times your term life benefit taken 40 years ago, 3. your term life benefit is now worth peanuts, 4. you no longer have to work and earn money
and hence, you no longer need life insurance. what you really need at this point is life annuity, not life insurance.
The sad fact at the present moment is that most insurance advisers are like cats tasked to guard the goldfish bowl. We should break their monopoly by having several low cost options available.
Well, Priyadi, its hard to say depending on what kind of life insurance was bought, and what stage of life he/she is at.
Mr Tan had mentioned it that most financial consultants/agents should let the client choose in the end.
raymond t, also made a valid point of breaking monopoly by having several low cost options.
I might be sounding defensive in the whole life policy thing, but really, most of my friends are somehow misleaded into lapsing their whole life policies to persue a cheaper term policy, hence incurring the upfront costs.
And life annuity, hard to say... the payout isn't really too attractive, even CPF pays better... haha...
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