Reduction in yield

If you buy a life insurance policy, you will receive a policy illustration (comprising of several pages) that shows many figures.

You can look for an explanation of the following:

1. Total distribution cost
2. Effect of reduction
3. Reduction in yield

All insurance companies are required to provide them in a common format.

One key figure that you should study is the reduction in yield. It shows how the total distribution cost and other charges impact on your yield.

Here is an example of two plans, for 25 years, offered by the same insurance company. The gross investment yield is projected tobe 5.25% (not guaranteed).

                       Reduced    Reduction
                        yield      in yield                   
Endowment policy        4.61%        0.64%
Endowment (new)         3.74%        1.51%
_
If you save $300 a month for 30 years, the difference is as follows:
_
Net yield             Total on
                      maturity 
 4.61% p.a.           $166,600
 3.74% p.a.           $147,500
 Difference           $ 19,100

The new product provides an annual payback of 5% of the sum assured from the second year. It has high distribution cost, which reduces the yield.

Lesson: Buy simple products that offer a better yield.