Personal risks can be classified in six categories:
a) Earnings risk - unexpected decline in income due to death, sickness or unemployment
b) Medical expense risk - to recover from sickness
c) Liability risk - due to negligence, e.g. use of motor vehicle
d) Physical asset risk - loss of home, car or other property
e) Financial asset risk - decline in value of financial assets
f) Longevity risk - living too long and running out of savings
The first four types of risk can be insured. You should look for low cost insurance. This allows the remaining savings to be invested to provide for your retirement and other financial needs. You can buy life annuity to cover the risk of living too long.
Sunday, February 10, 2008
Whole life, premium payable for 25 years
Dear Mr. Tan
I learned about your blog site after reading the Edge Weekly Paper. I was intrigued by your revelation on life insurance.
I have a $50,000 whole life insurance plan with annual premium of $1,000 payable for 25 years. After 25 years, I do not need to pay any more premium, but remain insured. The cash value at the end of 25 years is $30,900 (of which about two-thirds are guaranteed). Did I get a good deal?
I have already paid two years' premium. Should I continue the policy?
REPLY
If you pay $1,000 a year for 25 years and get back a cash value of $30,900, the return is 1.6% p.a.
Alternatively, you can spend $100 a year on Term insurance and get a higher coverage. If you invest $900 a year for 25 years to earn 4.5% p.a. (not guaranteed, but quite conservative), you will get back $41,900; If you earn 4%, you will get back $39,000.
Read this FAQ:
http://www.tankinlian.com/faq/savings.html
If you write off the loss of 2 years premium (which you have already paid), the yield on $1,000 for 23 years with a return of $30,900 is 2.4%. It is still low, but probably all right. I suggest that you keep this policy.
Lesson: Avoid high cost life insurance, where a large part of your premium is taken away to pay charges. If you are already committed, it is better to keep the policy.
I learned about your blog site after reading the Edge Weekly Paper. I was intrigued by your revelation on life insurance.
I have a $50,000 whole life insurance plan with annual premium of $1,000 payable for 25 years. After 25 years, I do not need to pay any more premium, but remain insured. The cash value at the end of 25 years is $30,900 (of which about two-thirds are guaranteed). Did I get a good deal?
I have already paid two years' premium. Should I continue the policy?
REPLY
If you pay $1,000 a year for 25 years and get back a cash value of $30,900, the return is 1.6% p.a.
Alternatively, you can spend $100 a year on Term insurance and get a higher coverage. If you invest $900 a year for 25 years to earn 4.5% p.a. (not guaranteed, but quite conservative), you will get back $41,900; If you earn 4%, you will get back $39,000.
Read this FAQ:
http://www.tankinlian.com/faq/savings.html
If you write off the loss of 2 years premium (which you have already paid), the yield on $1,000 for 23 years with a return of $30,900 is 2.4%. It is still low, but probably all right. I suggest that you keep this policy.
Lesson: Avoid high cost life insurance, where a large part of your premium is taken away to pay charges. If you are already committed, it is better to keep the policy.
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