Effect of deduction

Dear Mr. Tan,
You have written about the "effect of deduction". I am still not clear about this concept. Where can I find this figure? What does it mean?

REPLY
When an insurance agent sell you a life insurance policy, the agent is required to give you a Benefit Illustration. It shows the projected cash value and protection value (i.e the amount payable on death) at various durations of the policy.

There is a column called the "effect of deduction". It shows the amount that is taken away from you at the various durations. This amount is used to pay the marketing expenses, management expenses and life insurance cover.

For example, if your total savings over a period of 30 years is $150,000 and your gain is $100,000 (say), you should get $250,000. If the "effect of deduction" is $60,000, you will only get $190,000. Int his case, the deduction takes away 60% of the gain.

If you invest through other products, the expenses and fees usually take away about 15% and leaves you with 85% of the actual gains. The deduction under a life insurance policy is much higher and usually leaves you with less than 50% of the actual gain.

If you are being sold a life insurance product, ask the agent to show you the "effect of deduction". If the deduction is less than 20%. the policy gives good value. If it is higher, you should look for other investments.