Policy with annual payout

Dear Mr Tan,

An agent wanted to sell me a life insurance product with an annual payout. Is this a good product?

MY REPLY

When you pay this type of product which is offered by several insurance companies, you are paying two premiums:

1. $x is used to provide the death and maturity benefit, like an endowment policy
2. $y is being used to provide the annual payout back to you.

The problem is that the agent earns a high rate of commission on the $y and you actually get back less than $y from the second year onwards. The $y completely disappears from the first year.

It is better for the policyholder to pay $x for the endowment policy (and get a return of 3% to 4% per annum) and save the $y in a bank account. At least you get the $y back every year, with interest at say 1%. This provides better liquidity and flexibility.

Alternatively, you can invest the $y in a unit trust and take your risk and reward.