Poor return on a whole life policy

Hi Mr Tan,

You posted a story about a whole life policy that gives a return of 1% p.a. over the next 10 years. Why is the return so low? How does the cash payment every 5 years caused the return to be lower?

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REPLY:

Normally, a basic whole life policy should give a return of about 2% p.a. (after paying for the cost of life insurance and the sales charges). If you add a cash payment every 5 years, it reduces the return by about 1% p.a. Here is the reason.

To fund the cash payment, you have to pay an additional premium. The yield on this additional payment should be about 3% p.a. However, after deducting the high commission paid to the agent, you will get a negative return on this additional premium. This reduces the return on the basic whole life policy.

The agent likes to sell this product to you. He or she can earn the high commission on this additional premium as well. But, it is not in the interest of the consumer.

I hope that insurance agents or advisers can act ethically and offer products that give good value to their clients.