Tuesday, March 19, 2013

Why life insurers make so much profit

A former colleague went to work for an international insurance group that has a successful operation in Singapore and other countries in Asia. 

He told me, "Mr. Tan, the business of this company is so profitable, that you will be surprised. They can make a profit in one year what you made in NTUC Income for 30 years. "

Just think. How does a life insurance company make its profits? Especially after they paid tens of millions in commission to its agents each year. Where does the money come from to pay the commission and the large profits?

Yes. It comes from the policyholders. The unsuspecting people who are told that life insurance is the best way to protect your family and to get your money back

This is a bad solution. This is why I try hard to pass the message to young Singaporeans. If you put your savings in the investment linked policies or other policies of these insurers, take a look at the benefit illustration. It will take you 15 years to break even, i.e. for the cash value to pay back the total premium that you have paid.

If you invest the same premium in an index fund, your savings is likely to grow by 50% AFTER ALLOWING FOR THE COST OF TERM INSURANCE.

Do you want your savings of $6,000 a year to reach $90,000 in 15 years (i.e. break even) or $135,000 (50% more)? The difference is $45,000.

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