A life insurance company advertised the high return (over 5% p.a.) on its policies that has matured in recent years. There is a risk that the agents may mis-use this information to sell their current policies. The possible mis-use are:
a) The high yield was obtained during the past three decades under an environment of high interest rate and economic growth. The future economic environment is quite different.
b) The expenses in the past on the old products were much lower than the new products that are being marketed today.
If the agent or consultant tells you about the high yield, but did not tell you the two key factors (shown above), you should distrust the agent for not being transparent and honest.
When you get a benefit illustration from any insurance company, including one that advertised a high return on matured policies, look for the following:
a) Distribution cost as percentage of premium. If it is more than 50%, it is too high.
b) Look for the "effect of deduction" after 20 years or longer. If it is more than 20%, it is too high.
c) See the proportion of the maturity benefit that is "not guaranteed". Avoid policies that "bump up" the "non-guaranteed" bonus at the maturity date to show a high payout. You may not get this bonus, but it will be too late at that time.
You can get more information from my book, Practical Guide on Financial Planning. There is a table that shows the benchmark for the effect of deduction for various years to maturity.
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