Breakeven point

Dear Mr. Tan,
What is an acceptable break-even point for a life insurance policy? I have a policy that breaks even after 20 years, i.e. the cash value is more than the premiums paid. Is this acceptable?

REPLY
If you are saving your money, the break-even point should be 0 years. This is what you get when you put your money in a bank account. You can withdraw it at any time without penalty.

If you invest in a unit trust with a front end load of 2% (or less), you can break even within 1 year (provided that the stock-market gives a positive return.

A life insurance policy takes many years to break even due to the high commission paid to the insurance agent. If the distribution cost is 50% of the annual premium, it should take 5 years to break even. If it is 100%, it should take 7 years to break even.

I consider a distribution cost of 50% to be rather high, but may be acceptable. Your life insurance policy should take 5 years to break even. If it takes longer than 5 years, it is not good for consumers. There are better ways to invest your money.

However, if the life insurance policy is able to give an attractive yield, compared to other types of investments, you may accept a higher break-even point of 7 years.

Tan Kin Lian

NOTE

The break-even point is the number of years required for the surrender value of the policy to reach the total amount of premiums paid.