Benefit Illustration - Single Premium Whole Life Policy

I analysed the benefit illustration for a reader of my blog. The figures have been changed or removed to protect the identity of the policyholder.



1. You are investing a single premium of $30,000 in a life insurance policy. The distribution cost represents 7.9% of the invested sum. This is high, but it is typical of life insurance policies (where a high commission is paid to the agent).

2. If you decide to terminate the policy within 5 years, you will get a cash value that is less than the single premium. This policy, like all life insurance policies, provides poor liquidity. You cannot withdraw your investment without suffering a high penalty. As may need to withdraw your investment to meet some unexpected cash need in the future, it better to have the flexibility, especially in an uncertain world with insecure employment.

3. Here is the projected yield on your investment. If you keep the investment for 30 years, you are guaranteed a minimum cash value which represents a yield of 2.33% p.a. If the insurance company is able to earn an average yield of 3.75% on its investments in the future, they projected a non-guaranteed payout which a yield of 3.1% p.a. If they earn 5.25%, the non-guaranteed payout represents yield of 3.96% p.a. These yields are reasonable, but not attractive.

4. If you decide to invest on your own in an exchange traded fund, such as the STI ETF, and you receive an average yield, net of charges, of 5.25% over 30 years, your investment would accumulate to an amount that is 45% more than the non-guaranteed cash value provided by the life insurance policy at the end of 30 years.

5. I usually recommend to young people to learn about managing the risk of long term investments. After they understand the risk, they would usually prefer to invest in an exchange traded fund (which offers diversification of risk) and a potential better return. They will face short term fluctuation, but they understand that the fluctuation does not really affect the long term value of their investment.

6. You are offered an option for you to buy a rider that will accelerate the payment of the sum assured when you contract one of the critical illness. This “acceleration” means that the sum assured is payable earlier, rather than being paid on death. However, there is an additional cost for this “accelerated payment”. I think that the chance of making a claim is quite low, and this cost is rather high. But, I do not have the statistics to know if it is worth paying this additional premium for the accelerated benefit.

Tan Kin Lian