The writer is not a certified financial advisor and his insurance philosophy is outlined in this brief. Do consult with a certified financial advisor to get a second opinion before making decisions.
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Yesterday I got a message from an old friend of mine. A friend approached him to introduce Great Eastern Prestige Harvest to him.
This product was introduced as a Single Premium Insurance policy.
- Premium is USD 90,000.
- Non-participating. This policy does not earn bonuses from a participating fund from the Insurance company.
- Denominated in USD. Which means that you are subjected to currency fluctuation risks.
- Interest Accrued Daily. I am not sure how this matters, but if compounding takes place daily then its definitely a good thing.
- Sales charge and expense charge. The sales and expense charge is 17.75% of single premium and 8% of single premium additions. The agent quoted that you will only break even at the 8th year.
- Monthly Insurance Charge. A monthly insurance charge will be deducted from the account value and will vary according to the Net Sum Assured (Sum Assured – Account Value) and Life Asured’s gender, smoker status, country of residency at inception, age next birthday at the policy anniversary prior to the deduction date at the beginning of each policy month.
- Guaranteed rate of 3% yield. The yield on this policy is guaranteed to be 3% + 1% per annum that varies.
Personally I really don’t have that much experience with Single Premium Policy. I think other more qualified bloggers or iFAs can advice.
Objective of this policy
My first question to my friend is what is the objective of this policy? Is it more to be meant as savings or insurance.
If its insurance, you will need to evaluate it against
- Whether Single Premium serves his needs or another insurance instrument is better.
- Other Single Premium Policies
- Other Insurance instrument (Limited Whole Life, Term Life Insurance)
If it is for saving money
That’s a lot of savings! Should you invest all your net worth on a Single Policy?
Firstly, I would like to applaud my friend. That’s a huge sum to invest or save up to. converted to Singapore dollars that is almost SGD 117,000 and a sum that I can hardly come close to.
Goes to show how most of my friends around me tend to be savers.
But the question is how much is this amount as part of his networth?
Would you be comfortable in dumping all your networth into one insurance policy?
Those are the questions only my friend can answer.
Personally, I will not. EVERY INVESTMENT VEHICLE has its upside and downsides.
Capital Guaranteed vs Inflation?
My friend likes this as it is a form of savings. My take is that 3% ain’t shabby at all.
Sure, my dividend stocks yield more than that (Folks can take a look at them at the side.) and on my Dividend Stock Tracker you can see all the prevalent yields of dividend stocks in Singapore.
But do note that if you like me spend some time muddling through and not making much initially, then 3% is really a good long term return without losing anything.
But the question comes into place is that what if inflation hits. Remember that current situation has some parallels to 1970 to 1982 inflationary times.
Back then the interest in your POSB bank is 7-8% alone.
Now imagine USD 90,000 tied up and you earn 3-4% when the bank is offering 7-8% on no risk deposits. You are losing a lot of future spending power!
This 3% is like a bond, which if you lock in for 30 years, means you earn 3% if you die die hold this for 30 years.
In this case, you will be committing to this policy for a long time as well.
A depreciating USD
My friend likes this a lot because the USD is at a low and there are opportunity for it to go up.
I leave this up to you guys who watches currency trends. I am no expert here. But my take is this:
The world is currently contains a lot of nations in debt and the best way to make debts worthless is to inflate the money.
Why pay such a high sales charge and monthly charges?
Ok how much is 17.75% of USD 90k? That’s almost USD16k! Ok I am not sure if this is all the distribution charges but that means when my friend puts in the money, the insurance agent and the company earns 16k within the first few years.
That’s pretty darn good product if you ask me from Great Eastern point of view.
On top off that, there are monthly charges as well.
I do not know the inner workings, but the 3% is on the total premiums paid? if that is the case still ok but if its 3% on (90k – 16k) then this is really a lemon.
Alternative 1: SGS Bonds
This latest yield table is taken from Fundsupermart.com, which you can buy Singapore Government bonds with as little as SGD 1,000 investments.
The considerations of this compared to that Single Premiums are:
- Capital Guaranteed (provided Singapore don’t collapse) if you hold it for the duration of Years to Maturity.
- Low cost!The nominal cost you pay for SGS bonds is minute compare to the layered cost of this Single Premium Policy.
- Still subjected to inflation risks. You are still subjected to inflation for this period. So if you buy one that is 16.15 years to maturity, you are effectively locked in to the yield of 3.11% for this 16.15 years
- You earn more than break even with the same risk! The single premium breaks even at 8 years. But for SGS Bonds if you put this SGD 117,000 into it for 8 years, at 2.46% for a bond maturing at 8 years, your SGD 117,000 will be SGD 142,000.
- No insurance component.
Alternative 2: Blue Chip Dividend Stocks or US Dividend Aristocrat
The other alternative I can think of is to invest in a blue chip dividend play like Keppel Corp or Singtel. I written much about investing in Telco stocks here at Investment Moats.
This is not really a strong alternative, since it involves risks
- Not Capital Guaranteed. Unlike the low risk for SGS bonds, stock prices fluctuate and you have to believe in long term sustainability of a company like Singtel. But then again, Great Eastern can collapse as well. Although the government have mandated mandatory funds from insurance companies to prevent that catastrophe.
- Potential of Capital Appreciation. A stake in blue chips is believing in the economic growth of Singapore’s biggest companies.
- A potential growing dividend yield. Currently Singtel yields 4.6%. At a lower sales cost you stand to make much more than the policy. And there is a possibility that dividend will grow with time. Singtel have hike up div by 10% this year. Also note that dividend can be trimmed down as well.
- Lower cost compared to Single Premium policy.
Alternative to this is that, if he wants to make a play for USD, why not a Dividend Aristocrat that have been increasing dividend for 48 years like Pepsi?
I got to get to work. But my general feel is that savings need not be through an insurance policy. most of the time it is for the ill informed. If my friend reads up on his own I am sure he can achieve great as well.
As usual, not an advisor and hopefully readers can comment where they disagree with me.
Investment Moats is an investment weblog focusing on dividend investing, growing passive income and personal finance. Learn how to easily budget with my envelope budgeting strategy to save money and not overspend.
Saturday 5th of November 2011
Hi Adrian, thanks for shedding light on Universal Life Policies.
What i don't get is whether you are implying that if banks don't provide premium financing to the insurance company, this would collapse not the person buying the insurance right?
Saturday 5th of November 2011
Universal Life policies are not exactly very attractive without the premium financing from banks. There is a Day 1 cash value for these ULs and they can take up to a certain % as a loan from the bank. As the current interest is very low, many people took up this offer. They only need to put in about 20% of the total Single premium as hard cash and the rest as loan. They will only pay the low interest of the 80% loan. There is hence a strong leverage factor here for coverage.
The breakeven point of this policy is about 4-5 years if the projected 4.75% crediting rate is fulfilled. The cash value component grow relatively fast after the breakeven year and should be enough to cover the interest that was earlier paid. Effectively, it seems like the person will be getting free insurance for all the years, especially if the interest rate stays low. (Many people use the coverage as an insurance to cover their mortgage loan)
Some risk include depreciation of US$, Liquidity risk of early withdrawal, Interest Rate risk where the loan interest gets higher, Risk of Crediting Rate being cut when interest rate environment continue to stay low, etc...
The bankers are selling ULs like hotcakes and they are laughing their way everyday because the commission are really good and yet sounds logical to a non savvy investor like all of you here.
Wednesday 29th of June 2011
WOW...just wow! When did life insurance become an investment that you compare to a stock or mutual fund? A single premium life insurance policy has it's place and is a good option for senior citizen (60 or over) who has money that is not needed and is meant to be left to his or her heirs. This is earmarked funds to be past on. There are several advantages to the policies: a. They make an immediate estate to transfer to the heirs. When one can take 100,000 and turn it into 200,000 face value policy with the sign off and the deposit that regardless of when one dies that 200K is guarantee to go to the heirs...that is a good thing. b. When the money goes to the heirs tax free, that is an even better thing. c. If there are safe guards built into the policy like the ability to withdraw funds if needed, an accelerated death benefit and a long term care provision for both home health care and nursing home care, one has some additional protection the senior citizen. d. Over the last 30 years I've watched seniors lose their life savings during downturns in the stock market. This insurance policy also provides just a bit of security against losing it all due to gambles taken in the market.
It is not met as a "savings vehicle" nor an "investment vehicle". It is meant to take "leave behind money" and create a large estate with it that passes on tax free to the heirs (i.e children). And as a fall back in case of an event like a critical illness. To use it any other way...well that just unethical. However for anyone to say it does not have a place in the marketplace because they have a bias towards or make money from selling bonds, stocks etc...well that is wrong too. Unless you are an insurance agent, you shouldn't be giving insurance advice. (reason why I don't trust either Susie Orman or David Ramsey...neither are insurance agents nor do they understand insurance policies).
From the statements I have seen, the majority here are into investments. Fine...just realize the main reason for life insurance is not for it to be an investment, it is to make financially whole after a death or efficiently pass an estate to children/heirs with a minimium or better yet complete avoidance of inheritance tax. As a person who lost a loved one to ALS I know how important that $250,000 whole life policy and a couple of smaller final expense policies were to my mom. It got her out of debt and allowed here to keep the house. She would have been even better off if some financial guru wouldn't have conviced her husband into cashing in his $500,000 whole policy and investing it in mutual funds back in 2004. He was over 65 when he did that...the crashes wiped out the invested money, ALS took the rest .. he died at the age of 79...however he didn't leave his widow distitute..thanks to the whole life policy and several final expense policies and a pension...she is doing okay. Not great but okay. So my point..when writing your blogs about life insurance...please remember what a life insurance policy is meant to do and more important that the larger policies..ie whole life, Universal life and even single premiums are often need in the golden years to ease the financial pain of a critical illness or provide for the widow or widower.
Friday 25th of March 2011
hi john, the insurance company made it difficult for us. we did not really ask for this all the time.
no 2 plans are the same. why? because had we made it easy to compare they cannot leverage professional charges and expert services on us not to mention we will commoditize and compete on cost.
as for your illustration, i think it is flawed. a competing alternative term would be much less than this. Its not about paying it now or future, it is eventually which one will be less.
Friday 25th of March 2011
Hi Prasad, interesting figures perhaps you can provide a table showing the distribution and how it will break even within such a short period. it is seldom heard that break even to be so soon.