High cost of Investment Linked Policy

A policyholder sent the projection of his investment linked policy. I calculated the result as follows:


Annual premium: $2,160


Projected yield at end of 20 years:
Gross yield: 5% p.a.
Projected cash value: $47,400
Net yield: 0.9%
Reduction in yield: 4.1%


Projected yield at end of 20 years:
Gross yield: 9% p.a.
Projected cash value: $64,200
Net yield: 3.8%
Reduction in yield: 5.2%


The reduction in yield varies from 4.1% to 5.2%. This is excessive. The ILP is extremely costly and gives a poor return to the policyholder. The charges taken away from the policy are far too high.


If the policyholder buys a decreasing term assurance and invest the remaining savings in a low cost investment fund, the reduction in yield is likely to be 1.5%.


The difference in yield of 3% can give the policyholder about 35% more in cash value at the end of 20 years. Read this FAQ:
http://www.tankinlian.com/faq/savings.html


Lesson: Avoid high cost investment-linked plans. It gives a poor yield due to high charges.