Return on Vivolife policies

Catherine Choong posted a detailed posting on Vivolife (i.e. whole life policy with premiums paid for 20 years) in The Online Citizen. She pointed out several benefits of the policy, (which I accept). The main drawback of the policy, in my view, is the somewhat low return to the policyholder at the end of 20 years.

A few weeks ago, a policyholder asked my advice on three Vivolife policies that he bought for his family. I calculated the return on the policies as follows:

  1.      2.       3.       4.        5.        6.     7.   8.
Policy  Premium  Accum   Expected  Cash Value  Gain    %  Taken
        20 yrs    @4.5%   gain      20 yrs     in CV       away
Self    $29,080  $47,666  $18,586   $34,907   $5,827  31%  69%
Wife    $24,340  $39,890  $15,550   $29,478   $5,138  33%  67%
Son     $23,420  $38,389  $15,969   $30,234   $6,814  42%  58%

The total premium paid for 20 years is shown in (2). If the premium is invested to earn a net yield of 4.5%, the accumulated amount is shown in (3). The expected gain is shown in (4). The cash value of the policy (based on a gross yield of 5.25%) is shown in (5). The gain in cash value is shown in (6).

Assuming a gross yield of 5.25%, the Vivolife policies took away between 58% to 69% of the expected gain, leaving 31% to 42% of the gain to the policyholder. If the gross yield is lower, the value to the policyholder will be even lower.

If the policyholder buy the insurance cover separately, the cost of the cover is likely to be not more than 20% of the expected gain (just my guess). A good adviser will be able to calculate this alternative cost for the customer to make an informed choice.

If these examples do not reflect a true picture of the return on the Vivolife policy, I hope that Caterine Choong will send some other examples to me. I shall be happy to post them here.

Note: I believe that the Vivolife gives better values compared to similar products in the market (although I do not have concrete evidence on this point).