Locked into a poor policy

 A consumer showed me the benefit illustration of a 21 year anticipated endowment policy taken 18 years ago for a large life insurance company. She paid $2,000 a year, comprising of $1,500 for the basic policy and $500 for the critial illness rider.

The projected maturity value in 3 years time is $25,000. The premiums paid for 21 years is $42,000, comprising of $31,500 for the basic policy and $10,500 for the rider.

I found the premium for the critcal illness rider (which does not provide any return) to be too expensive for the small amount of cover. The return on the main policy is negative, and is lower than the total premiums that was paid.

The consumer asked if she should stop the policy now, as the return is negative. The cash value for 18 years of premium is so poor, that she had no choice but to continue the policy.

This large insurance company must have sold more than 100,000 policies of this plan (just my guess). The policyholders had no choice but to accept the negative return for 20 years of savings.

It is very sad that the consumers in Singapore have to suffer this type of treatment. They were financially unsavvy and trusted the insurance agents. However, these agents sold them a bad product, which was made worse by the cut in bonus rates and the reduction in the interest that is credited on the installment payments.

Consumers should avoid most types of life insurance products that give a poor yield on their savings. They should buy term insurance and save in a low cost investment fund, such as the STI ETF available on the Singapore Exchange.

Read my book, Practical Guide on Financial Planning.