Buy term and invest the difference

Dear Mr Tan,

I obtained the following quotation from an Income agent.

* Living policy to cover $200,000: monthly premium $404.00
* Decreasing term (extended to cover dread disease) for $200,000 for 35 years: monthly premium $76.40.
* Difference is $327.60

You advised me to invest the difference in a large, well diversified, low cost fund. But the return of 6% per annum is not guaranteed? There will be no protection after 65 years old? Do we need not to consider that?

KS

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Dear KS

If you invest the difference of $327.60 for 35 years, you will get the following:

Assuming average return of 6% per annum: total after 35 years is $451,000
Assuming average return of 4% per annum: total after 35 years is $295,000

If your savings accumulate to $451,000 at the end of 35 years, you will not need to have any insurance cover. Anyway, I suspect that the sum assured and bonus under living policy will be lower than $451,000 at that time. The cash value will be even less.

I have shown the calculation assuming a lower rate of return of 4 percent per annum. The accumulated sum is still quite attractive. In my personal view, the return is likely to be better than 6%.

Although the Living policy does not look so attractive compared to "invest the difference", I must say that it offers better value than similar policies offered in the market by other insurance companies.

Wish you all the best for the Lunar New Year.

Tan Kin Lian