Excessive deduction on investment-linked policy

Hi Mr Tan
I read about your explanation about Benefit Illustration and Effect of Deduction. I did a calculation on my investment-linked policy and found that the effect at the end of 40 years is 67%!


I am not sure my calculation is correct, would you help me out here? There was no mention of guaranteed cash value in the policy.

REPLY
I usually look at the effect of deduction for 25 years (rather than 40 years). Here are the figures taken from your benefit illustration.

At the assumed yield of 9%, the effect of deduction of $65,000 represents 55% of the value of accumulated premium of $118,000. At the assumed yield of 5%, the effect of deduction represents 52% of the accumulated premiums.

The effect of deduction of 52% to 55% is extremely high for a 25 year duration. In most other benefit illustrations , they are around 35% (which is already too high). In my book on financial planning, I advised that the effect of deduction for 25 years should NOT exceed 20%.

The cash value is NOT guaranteed as this is an investment linked policy. There is no guarantee on the maturity benefit or cash value.

I do not understand why this policy should take away so much from the policyholders. Clearly this is excessive, amounting to a rip-off of the trusting consumer.

There is additional premium payable for the riders. I do not know if the premium rates for these covers are too high. But they have to be paid for separately.

Please consider this suggestion: write a strong letter to complain to MAS for this type of excessive deduction. It does not seem right for consumers to be given such a poor deal.

Practical Guide on Financial Planning