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Monday, May 14, 2007

Whole life a cash payment every 5 years

Here is a whole life policy with a cash payment every 5 years:

* sum assured $25,000
* cash value in 2007: $4,300
* cash payment of $3,750 in 2007 and 2012
* cash value in 10 years time: $8,250
* annual premium: $1,158

I computed the yield on this policy for the next 10 years to be 1% p.a. It is a poor yield. (In my calculation, I assume that the cash payment can be reinvested to earn 2% p.a.)

If he had bought a straight forward whole life plan, without the cash payment, the yield would have been better (ie maybe closer to 2% p.a.). The cash payment reduced the yield.

Tip: Do not invest in a plan with a cash payment every few years. You get a poor return.

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