Do not trust unrealistic projections

Dear Mr. Tan,
I would like to seek your advice on a policy which I had signed up, which is still within the 14 day free look period.


1) The benefit illustration of my policy showed that the "effect of deduction" drops significantly in the 25th year as compared to the 20th year. Would you know the reason for this?


Reply: I do not trust this type of projection where the effect of deduction drop "magically" after 20 years, i.e. the maturity value increases "magically" on the 25th year. When the time comes, the insurance company will find many excuses to tell you whey they are not able to pay out the "magical" increase. Remember, these figures are not guaranteed.


2) I am a bit confused as to which year I should take to calculate the "effect of deduction". Assuming 5.25% Investment Return, the effect of deduction at the 20th year is 37% while at the 25th year, it is 17%. The difference is vast and if I take the 20th year calculation, the policy is obviously too expensive but if I take the 25th year calculation, the policy appears reasonable. Can you advise which is the correct figure I should use?


Reply: Do not trust the "magical" figure shown on the 25th year.


3) I informed my agent that distribution cost works out to be 7.3% which is quite high in my opinion. However, he informed me that over 25 years, the distribution cost only works out to be 0.3% a year and that if I buy ETF yearly, the transaction costs will work to be around there. Is this argument valid?


Reply: If you invest in ETF, the distribution cost is 0.3% of the total invested sum, compared to 7.3% for the life insurance policy. It is dishonest for the agent to divide the 7.3% by 25 years and say that the cost is the same. The agent is telling you a blatant lie.


4) I informed my agent that I have heard horror stories of policies falling way off projected returns upon maturity. However, he mentioned that in the past, the projections were very high and that now, MAS has regulated the projections to be a very reasonable and definitely acheivable 5.25%. Again, is this true?


Reply: The horror story will happen again in the future, due to the unrealistic projection on the 25th year.


5) I highlighted that saving through ETF or investing in equities may yield more but my agent informed me that it is easier said than done and it takes a lot of discipline to keep investing and monitoring shares and buying the policy would be a disciplined way to save for the future. What do you think of this?


Reply: It is easy to keep investing in ETF. You will have better control of your money. There is no need to monitor the ETF as it is well diversified and invested in 30 large shares.


6) Finally, do you think that this policy is reasonable and I should keep it or is it too expensive and I should terminate it while I still can?


Reply: I would take advantage of the 14 day free look period, and give up the policy for a full refund.

You can buy my book, Practical Guide on Financial Planning here. Spend $12 and save a few thousand dollars. Be educated. Do not be misled by dishonest agents.