Sunday, August 07, 2011

Benchmark yield

Dear Mr. Tan
What is the benchmark for the yield on my savings until retirement. How do I calculate the yield on my life insurance policy?

Your target should be a yield of at least 5% per annum. If you look at this article, you will find the yield on the Straits Times Index Exchange Traded Fund (ETF) over the past 20 years is more than 9% per annum, after deducting expenses. The yield in the future should be at least 5% per annum, after deducting expenses.

If you wish to invest in a unit trust, instead of the Straits Times Index ETF (from SDPR or DBS), you should choose one that has an expense ratio of less than 1% per annum (as the above two ETF has an expense ratio of only 0.3%).

To calculate the yield on a life insurance policy, you should use the Excel function called "Rate" to calculate the yield. For example, if the annual premium is $5,000 and the cash value at the end of 30 years is $200,000, the yield is 1.9% per annum. If the cash value is $300,000, the yield is 4.4% per annum. So, the life insurance policy is satisfactory , if it gives $300,000 (instead of $200,000) in this case.

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