Better return from a Low Cost Fund

Dear Mr Tan,

Would like to have your opinion regarding the Life policy. Kindly refer to the attached.

* Main Benefit Illustration - Basic (Non-Par).
* Supplementary Benefit Illustration (Coupon Schedule).

Yearly premium S$1,136
Sum Assured S$25,000
Policy started on 1st Dec 2002

According to my agent, the cash value is fixed! The return will not be affected by the market performance. I have already received the first payment, S$3,750, recently (every 5 years).

REPLY

You pay a yearly premium of $1136

You get $3,750 every 5 years, which is assumed to be re-invested to earn 4% p.a.
After 40 years, you can expect to receive a total of $80,666, comprising of the guaranteed sum of $44895 (inclusive of the coupons) and the interest of $35,791 (assumed to be 4%, non-guaranteed).

This gives you a net yield of 2.7% over 40 years.

If you have set aside 10% of the premium to buy your Term insurance, you would have obtained a much higher sum assured compared to this policy.

If the remaining 90% were to be invested to earn 4% per annum, you would have received a total of $97,100 at the end of 40 year (i.e. 20% higher than $80,666).

It is likely that you can earn more than 4% per annum in a large, well diversified fund. If the return is 5%, the total amount at the end of 40 years is $123,500 (or 53% more than $80,666).

Your Life policy policy gave you a poor return due to the high charges (to pay commission to the agent and profit to the insurance company).

Read this FAQ:

http://www.tankinlian.com/faq/fptips.html
http://www.tankinlian.com/faq/returns.html