A person in the last 20s, who is in the high net worth category, was offered a single premium life insurance policy. He has to invest $250,000 in the policy to cover $1,500,000. At the end of 30 years, the cash value of the policy would have been $500,000 (and it was not guaranteed). He asked my view about this policy. Here is my reply.
If you invest the same $250,000 in the Straits Times Index ETF and it earns an average yield of 5%, your investment would grow to $1 million at the end of 30 years. The chance of premature death during this period is 5%. The chance of surviving 30 years is 95%.
It does not make sense to give away half a million dollars in this single premium policy when the chance of a higher payout is only 5%. It is better to invest the money in the ETF. If you really need insurance, you can buy term insurance for $1,500,000 by paying an annual premium of $1,800. Over 30 years, your total cost would have been $54,000. Why give away $500,000?
The insurance agent was able to hoodwink the consumer by telling him that this investment product is specially designed for high net worth people, like him. It does not matter whether you are high net worth or not. Just look at the yield on the investment and compare it with what you can earn by investing in the ETF. The result is probably the same - the insurance policy will take away 40% (or more) of what should be yours.
The distribution cost for the policy was $36,000. This is the amount that the insurance agent and his agency manager would have earned by selling a bad product to you. And it comes from you, upfront. You are paying more 15% of your savings upfront for this bad product. Why should you give so much to an agent who sells a bad product to you?
I strongly encourage consumers to attend the educational talks organised by FISCA. If you do not spend the time, you are likely to lose a lot of money by investing in the bad products. And you deserve to be ripped off!