Buying the right life insurance policy

A lady in the mid 30s was sold a whole life policy with premiums payable for 30 years. It covers $100,000 payable on death, permanent disability and dread disease. The annual premium was $3,850. The agent said that it was a good policy, as the premium stops after 30 years, and the policyholder will remain covered for life.

The cash value at the end of 30 years was projected to be $161,000 on an optimistic basis (assuming an investment yield of 5.25%). This looked attractive, compared to the total premium paid of $108,000.

However, if the policyholder were to set aside 5% of the premium to buy the cover against premature death or dread disease and to invest the remaining 95% of the premium to earn a yield of 4.5% per annum, the accumulated amount at the end of 30 years would have been $233,000. This would have been 45% higher than the cash value payable under the policy.

When the accumulated saving is $233,000, you do not need the $100,000 of life insurance protection that is paid under the policy. This type of honest advice is not given by the insurance agent who sells the limited premium policy.

You can read a few more examples of this type in my book entitled "Get value from your life insurance policy" which can be ordered here. You can also attend the talk organised by FISCA.