Tuesday, August 10, 2010
High deduction for investment linked plan
A graduate, who recently got a job, was approached by a friend to invest $300 a month in an investment linked policy. His friend showed him the colorful brochures of three funds with projections of yields of 5% and 9%. The graduate sought my views about these funds.
I asked him to send the benefit illustration to me. He initially sent me the fund brochures (which he mistook to be the benefit illustration). Later, he found the benefit illustration. Here is my reply to him:
1) The distribution cost for 5 year sis $6,383, representing 177% of your annual savings. Do you really want to give so much of your saving away?
2) Based on 9% yield (which is not guaranteed and over-optimistic), the accumulated premium at the end of 25 years is $332,366. However, the amount that is taken away from you is $131,966 (39% of total), leaving you with a net amount of only $200,400. This is a lot of money to be taken away. According to the benchmark in my book, an acceptable deduction is 20%.
3) Based on a more realistic gross yield of 5%, the projected cash value at the end of 25 years is only $115,900 representing a net yield of 2%. This is a hefty deduction of 3% from the gross yield of 5% and is not sufficient to cover future inflation.
4) This is a bad investment plan and should be avoided.
The graduate was also asked to pay another $150 a month for the death and critical illness cover. This is excessive, compared to the premium charged on similar cover in the SAF group insurance policy. It is so easy for the public to be misled into buying life insurance products that offer poor value for their savings.
Tan Kin Lian
Practical Guide on Financial Planning
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