I advise consumers to look at the benefit illustration for a whole life or investment-linked policy and check that the effect of deduction does not exceed 20% of the accumulated premium at the end of 25 years. This article explains why I chose 25 years as a gauge and how I derive the benchmark of 20%. It also give the benchmark for other durations. It is the SECRET that many consumers are looking for.
The benchmark looks interesting, but I feel there is a certain flaw in applying the 20%. It may make sense during earlier years when you used to be at the helm of NTUC. Lets say 8% return is the norm back then, and insurance companies take away 2%, roughly equating to 20% for the effect of deduction on a 25yr policy. In today's context, I believe everyone will be contented with 5% return. If insurance companies wish to preserve their profit margin, they will take away 2% (i.e. earn the same return per dollar of premium). But now the 2% becomes heftier relative to the 5% return, hence resulting in 40-50% deduction. Or do you suggest insurance companies should gladly accept half the profit margin and see a collapse in their share price? I think that won't be a prudent thing to do from a macro perspective. So we have to see both sides of the equation and not compare ourselves with countries which may be enjoying much higher interest rate in general. That will bring us to a more contentious topic, as to why MAS and the banks choose to keep interest rate so low. This is joy for the investors and woes to the retirees.
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