Sunday, November 18, 2012

Mistaken about the yield

Mr. X posted in my Facebook that he is happy with his Manulife policy that gave him a return of 6% p.a. On my request, he sent the details to me. I checked the calculations and found that he was mistaken. Here is my reply.
You are paying $376.64 in annual premium each year on this policy. The surrender value, at the end of 20 years, including the bonus, is $8,434. The yield for the 20 year period is 1.06% p.a. It is a poor yield. It can hardly keep up with the rate of inflation over this period.
Although the insurance policy does provide some life insurance protection, the cost of this protection is extremely small.
Most life insurance policies offer a yield of 2% to 3% p.a. and is still considered to be a poor yield. In my talk on insurance, I advised that the benchmark for a good yield is 4% p.a. on a life insurance policy.


JW said...

Manulife did declare bonuses of 6% the past few years, which is the highest in the industry. Maybe the BI doesn't count in the not-yet declared bonuses? I suppose if u factor it in the returns should be better.

Kin Lian Tan said...

Jw, the bonuses were factored in. Mr X sent the latest bonus statement and projection from Manulife to me. I counted the bonus declared and projected. the yield is poor.

Spur said...

The BI for any insurance product in S'pore already factors in the annual bonuses including future projected bonuses.

And the figures in the BI are already usually over-optimistic, based on gross returns of par fund of up to 5.25%pa.

So when you calculate the yield to be less than 2% over 20-year servicing period or holding period, then it's telling you that it is a crap product.

The problem is that 99% of financial salesman and 99.9999% of consumers are not able to do simple yield calculation to gauge whether the product is good value or not.

For this manulife product, you should be able to tell from the story that the lousy value is becoz it is over-priced, i.e. the premiums are too much for a very very low sum assured.

When you quote "6%", you should ask --- 6% of WHAT? Are the bonuses compoundable? Compoundable at what rate?

The standard terminology in S'pore is that the quoted 6% is of the sum assured. So if the sum assured is low, then the so-called bonus is also very small.

2ndly, the compounding rate for the accumulated bonus is usually different, and LESS THAN the quoted bonus rate.

At the end of the day, you're just getting shafted by the insurance companies and the salesman.

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