By: Tan Kin Lian

Tan Kin Lian picture A few months ago, a university student showed me a benefit illustration for an investment linked policy that was being proposed to him. He was still studying and had no source of income. His mother wanted to buy the policy for him. He asked my advice.

The benefit illustration contained 24 pages of details. It is incomprehensible to most people, unless it is “explained” by the adviser. The student was clearly confused.

Here are the key figures. The monthly premium is $200 (which would represent 10% of the income of a graduate who started to work).

At the end of 42 years, when he reached age 65, the total premiums paid would have been $50,400 and the non-guaranteed surrender value would have been $53,900 (if the life fund earned 5% p.a.) or $185,900 (if the life fund earned 9% p.a.). The next column showed the effect of deduction to be $341,915.

What is this effect of deduction, and why is this figure so big?

Hidden on one of the 24 pages are the following explanation:

The deduction relate to all the charges taken from the policy. These include distribution costs, expenses, mortality and morbidity costs, surrender penalty, expected transfers to shareholders and expected tax payments. The figures illustrated relate to the effect of deductions based on the projected investment rate of return of 9% p.a.

Wow! This means that if the Life Fund was able to earn 9% p.a., the insurance company would take away $341,915 and leave the policyholder with a cash value at 65 of only $185,900. Read more…