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Investing in a second hand policy
25 Jun 2021 (358 views)

Dear Mr. Tan,
Is it safe to invest in resale insurance as a form of bond?

I have been offered the following policy as an investment. I pay $56,427 now and will get a lump sum of $78,118 at the end of 6 years and 8 months. I calculate the simple interest return to be 5.76% per annum.

Is this safer than buying a bond since insurance companies has less chances of failing than big corporations.

Reply by TKL
From the benefit illustration, I see that the lump sum of $78,118 comprise of a guaranteed portion of $57,968 and a non-guaranteed portion of $20,150.

The non-guaranteed portion may include a terminal bonus which can be totally taken away if the stock market falls sharply in the year of maturity.

You need to see a breakdown on the non-guranteed portion between the regular bonus and the terminal bonus. Generally, the regular bonus is likely to be more stable than the terminal bonus.

You should calculate the compound interest return, rather than the simple interest. In this case, the return is 5% per annum.

If the non-guaranteed portion is cut by 50%, you will get a return of only 2.5% per annum.

Generally, an insurance company is likely to meet its obligations because it is well regulated. However, the insurance company is not required to pay out the non-guaranteed portion - as the payment is subject to future circumstances. 

Tan Kin Lian


Investing in a second hand policy
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Dear Mr. Tan,
Is it safe to invest in resale insurance as a form of bond?

I have been offered the following policy as an investment. I pay $56,427 now and will get a lump sum of $78,118 at the end of 6 years and 8 months. I calculate the simple interest return to be 5.76% per annum.

Is this safer than buying a bond since insurance companies has less chances of failing than big corporations.

Reply by TKL
From the benefit illustration, I see that the lump sum of $78,118 comprise of a guaranteed portion of $57,968 and a non-guaranteed portion of $20,150.

The non-guaranteed portion may include a terminal bonus which can be totally taken away if the stock market falls sharply in the year of maturity.

You need to see a breakdown on the non-guranteed portion between the regular bonus and the terminal bonus. Generally, the regular bonus is likely to be more stable than the terminal bonus.

You should calculate the compound interest return, rather than the simple interest. In this case, the return is 5% per annum.

If the non-guaranteed portion is cut by 50%, you will get a return of only 2.5% per annum.

Generally, an insurance company is likely to meet its obligations because it is well regulated. However, the insurance company is not required to pay out the non-guaranteed portion - as the payment is subject to future circumstances. 

Tan Kin Lian