Existing Life Insurance Policy

Mr. Tan,

I have an existing life insurance policy (details deleted). I do not need the insurance cover any more, as I have bought a large term insurance policy. Should I continue with this policy as an investment?

REPLY

You should ask your insurance company to tell you the cash value now, the cash value in (say) 5 years time and the premium payable for the next 5 years. If the yield on the policy is more than 3% p.a. you can keep the policy as an investment.

Here is a simple way to check if the yield is more than 3%.

Take the cash valuw now and muliply by the factor of 1.1593
Multipy the monthly premium by 64.6650 or the annual premium by 5.4684.
The total of the two figures is the "target value".
If the cash value is more than the "target value", you can keep the policy.

Here is an example:
Cash value now $5,000
Monthly premium: $90

$5,000 X 1.1593 = $5,796
$90 X 64.6650 = $5,820
Total = $11,616

If the cash value is more than $11,616, you can keep the policy. If it is less, you can cancel the policy.

If you wish, you can also deduct the cost of the term insurance from the monthly premium. For example, if the cost of the term insurance is $10 a month, the calculation will now be:

$5,000 X 1.1593 = $5,796
($90 - $10) X 64.6650 = $5,173
Total = $10,969

You can get the term insurance premium from my FAQ below. I think that it is all right to ignore this item, as you are using only 3% (which is somewhat low) to calculate the target value.
http://www.tankinlian.com/faq/benchmark.html

Some people think that they should take a different period (instead of 5 years) or use a different yield (instead of 3%) to calculate the target value. They are also right. It is a matter of judgement. I have adopted 5 years and 3% for simplicity.

I shall be writing a separate FAQ to give the factors for different periods and different yields.