Mr. Tan,
I have an existing life insurance policy (details deleted). I do not need the insurance cover any more, as I have bought a large term insurance policy. Should I continue with this policy as an investment?
REPLY
You should ask your insurance company to tell you the cash value now, the cash value in (say) 5 years time and the premium payable for the next 5 years. If the yield on the policy is more than 3% p.a. you can keep the policy as an investment.
Here is a simple way to check if the yield is more than 3%.
Take the cash valuw now and muliply by the factor of 1.1593
Multipy the monthly premium by 64.6650 or the annual premium by 5.4684.
The total of the two figures is the "target value".
If the cash value is more than the "target value", you can keep the policy.
Here is an example:
Cash value now $5,000
Monthly premium: $90
$5,000 X 1.1593 = $5,796
$90 X 64.6650 = $5,820
Total = $11,616
If the cash value is more than $11,616, you can keep the policy. If it is less, you can cancel the policy.
If you wish, you can also deduct the cost of the term insurance from the monthly premium. For example, if the cost of the term insurance is $10 a month, the calculation will now be:
$5,000 X 1.1593 = $5,796
($90 - $10) X 64.6650 = $5,173
Total = $10,969
You can get the term insurance premium from my FAQ below. I think that it is all right to ignore this item, as you are using only 3% (which is somewhat low) to calculate the target value.
http://www.tankinlian.com/faq/benchmark.html
Some people think that they should take a different period (instead of 5 years) or use a different yield (instead of 3%) to calculate the target value. They are also right. It is a matter of judgement. I have adopted 5 years and 3% for simplicity.
I shall be writing a separate FAQ to give the factors for different periods and different yields.
Saturday, March 8, 2008
Regular premium investment-linked policy
Mr. Tan,
My insurance agent advised me to invest monthly in an ILP policy, as I can benefit from dollar averaging. He said that if I invest a lump premium, which does not benefit from averaging. Is this a correct approach?
REPLY
The agent is probably telling you only one side of the story. You should ask the agent the following question:
"If I invest a regular premium, how much of my premium is invested? How much is taken away to pay expenses?"
"How much commission do you earn from a regular premium policy, compared to a single premium policy?
Most regular premium ILP in the market takes away up to 24 months of your savings. During the first year, a small proportion of your premium is invested, and the rest is taken away to pay commission to the agent and other expenses. The agent usually avoid explaining this charge to you, but is is disclosed in the policy illustration.
If you save $300 a month, the charges of 24 months amount to $7,200. This is a lot of money to give away, just by investing in a regular premium ILP. This is the most expensive part of an ILP policy.
Some insurance companies have a lower front-end charge. You should ask the insurance agent about it.
If you wish to do dollar averaging, it is better to invest in a unit trust. You do not have to incur this heavy front-end charge.
Read this FAQ:
http://www.tankinlian.com/faq/ilp.html
My insurance agent advised me to invest monthly in an ILP policy, as I can benefit from dollar averaging. He said that if I invest a lump premium, which does not benefit from averaging. Is this a correct approach?
REPLY
The agent is probably telling you only one side of the story. You should ask the agent the following question:
"If I invest a regular premium, how much of my premium is invested? How much is taken away to pay expenses?"
"How much commission do you earn from a regular premium policy, compared to a single premium policy?
Most regular premium ILP in the market takes away up to 24 months of your savings. During the first year, a small proportion of your premium is invested, and the rest is taken away to pay commission to the agent and other expenses. The agent usually avoid explaining this charge to you, but is is disclosed in the policy illustration.
If you save $300 a month, the charges of 24 months amount to $7,200. This is a lot of money to give away, just by investing in a regular premium ILP. This is the most expensive part of an ILP policy.
Some insurance companies have a lower front-end charge. You should ask the insurance agent about it.
If you wish to do dollar averaging, it is better to invest in a unit trust. You do not have to incur this heavy front-end charge.
Read this FAQ:
http://www.tankinlian.com/faq/ilp.html
Large increase in motor insurance premium
Dear Mr. Tan,
Last year, I insured my new car with NTUC as the premium is cheaper. I have just received the renewal notice, and found that the premium increased by about 20%. This is a shock to me. Why should the premium increased by so much? Is NTUC still trying to keep the premium lower than the market, or will it be more expensive, due to the big advertising expenses?
I do not want to stay with NTUC. Can you recommend any other insurance company that charge lower premium?
REPLY
I read that the claims on motor insurance have gone up last year, not only for NTUC Income but for other insurance companies as well. I am not sure if the increase for NTUC Income is due to higher expenses and lax claim control.
I suggest that you telephone a few insurance compamies directly and see if you can get a lower premium rate. Read this FAQ:
http://www.tankinlian.com/faq/motord.html
Someone sent me an e-mail a few days ago. By telephoning a few insurance companies for a quote, he was able to get a premium that was 30% lower. He said that it was time consuming but worth the trouble.
Last year, I insured my new car with NTUC as the premium is cheaper. I have just received the renewal notice, and found that the premium increased by about 20%. This is a shock to me. Why should the premium increased by so much? Is NTUC still trying to keep the premium lower than the market, or will it be more expensive, due to the big advertising expenses?
I do not want to stay with NTUC. Can you recommend any other insurance company that charge lower premium?
REPLY
I read that the claims on motor insurance have gone up last year, not only for NTUC Income but for other insurance companies as well. I am not sure if the increase for NTUC Income is due to higher expenses and lax claim control.
I suggest that you telephone a few insurance compamies directly and see if you can get a lower premium rate. Read this FAQ:
http://www.tankinlian.com/faq/motord.html
Someone sent me an e-mail a few days ago. By telephoning a few insurance companies for a quote, he was able to get a premium that was 30% lower. He said that it was time consuming but worth the trouble.
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