When an agent tries to sell you a life insurance policy, he (or she) is required to give you a benefit illustration. It is a detailed document comprising of more than 15 pages and contain a lot of confusing information. You only need to look for 1 figure - "effect of deduction" at the end of the 20th year. Calculate this amount as a percentage of the "accumulated premium". If this percentage exceeds 15%, you should avoid the policy. For example, if the effect of deduction is $25,000 and the "value of accumulated premium" is $100,000, the effect of deduction is 25%. As this is higher than 15%, you should NOT buy the insurance plan. In this example, you are paying $10,000 more than is fair to the consumer.
For investment linked plans, you are not given the value of accumulated premium. In this case, you have to add up the "total cash value" with the "effect of deduction" to get the "value of accumulated premium. Take the figures based on 5% projection (as 9% is unrealistically high). If the total ash value is $100,000 and the effect of deduction is $30,000, the "value of accumulated premium is $130,000 and the effect of deduction is 23%, which is too high.
Do not invest in any insurance policy, where too much of the accumulated premium is taken away from you. It is your money, and you deserve a fair rate of return for your years of hard work and savings. Do not give it away. Buy a term insurance for 25 years and invest your savings in a low cost investment fund, such as the STI ETF, Read about this concept in my book, Practical Guide on Financial Planning.
Tan Kin Lian
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03/14 - 03/21
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