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Term to 99
25 Apr 2020 (545 views)

Dear Mr Tan,

I purchased this policy when I was 25 years old, until age 99. This means:
  1. Total 74 years to pay
  2. With $2,604.36 annual premium, total output is $192,722.64 till age 99
  3. Total sum assured is $500,000
  4. With that, "returns" of $307,277.36 is 1.59 times.
Do you think this is an expensive policy? My thought is that monthly payment of $217.03 would be affordable as income increases over the year, especially say 20-30 years later. I would be able to leave this sum with my family in the event of my passing.

MY REPLY
I used Excel to do the calculations shown below

image.png

If you die at 99 and your family gets $500,000, the return is 2.32% p.a. (this is the compound rate of return). If you live beyond 99, you and your family gets $0. All the premium disappears. There is a chance of living beyond 99, as people are living longer nowadays. If you die before 99, the return to your family is higher than 2.32%.

If you buy a term insurance policy for a shorter period, say 20 or 25 years, and pay an annual premium of $500, and you invest the difference of $2,554 to earn 5% p.a. over 74 years, you will get $1,838,038. This is 3.6 times of $500,000.

The difference goes to pay the commission to the agent and his manager and the marketing expenses and profit of the insurance company.

 


Term to 99
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Dear Mr Tan,

I purchased this policy when I was 25 years old, until age 99. This means:
  1. Total 74 years to pay
  2. With $2,604.36 annual premium, total output is $192,722.64 till age 99
  3. Total sum assured is $500,000
  4. With that, "returns" of $307,277.36 is 1.59 times.
Do you think this is an expensive policy? My thought is that monthly payment of $217.03 would be affordable as income increases over the year, especially say 20-30 years later. I would be able to leave this sum with my family in the event of my passing.

MY REPLY
I used Excel to do the calculations shown below

image.png

If you die at 99 and your family gets $500,000, the return is 2.32% p.a. (this is the compound rate of return). If you live beyond 99, you and your family gets $0. All the premium disappears. There is a chance of living beyond 99, as people are living longer nowadays. If you die before 99, the return to your family is higher than 2.32%.

If you buy a term insurance policy for a shorter period, say 20 or 25 years, and pay an annual premium of $500, and you invest the difference of $2,554 to earn 5% p.a. over 74 years, you will get $1,838,038. This is 3.6 times of $500,000.

The difference goes to pay the commission to the agent and his manager and the marketing expenses and profit of the insurance company.