Living policy taken in 2004

A reader of my blog sent an e-mail to me. He read my blog and website and paid special attention to my writing on the benefit illustration. He checked the benefit illustration on the living policy that he bought from NTUC Income in 2004 (when I was still in charge) and found that the effect of deduction was 40%. He asked me to explain why I am now advising people to avoid buying a policy with a deduction of more than 20%, when the policy that was sold during my time had a deduction of 40%.

I asked me to send the benefit illustration to me. Here are my findings on his 2004 policy:

1. The distribution cost at end of 5 years is $1,817, representing 96% of the annual premium. Most policies from other companies have a distribution cost of 130% to 180%. (Still, I consider 96% to be high, compared to other alternatives available to you now, such as a low cost investment fund).

2. The effect of deduction at the end of 25 years, based on an assumed yield of 4.5% p.a. is computed as follows:

Cash value (non-guaranteed) $68,548 (78%)

Effect of deduction: $19,843 (22%)

Value of accumulated premium = $88,391 (100%) 

In this case, the effect of deduction is 22% of the total accumulated premium. It is quite close to my benchmark of 20% (as stated in my book on financial planning) and is much lower than what other policies take away from the consumer,(i.e. 30% to 40%). As this is a living policy (covering critical illness), it is all right for the effect of deduction to be slightly higher than 20%, as the policy provides a wider protection.

3. His calculation of 40% was wrong, as he used the wrong figures. I told him that the policy that he took in 2004 gave good value, compared to other policies available at that time. However, the policy may not be so attractive if the bonus had since been cut.

Read Practical Guide on Financial Planning