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Avoid switching from one life insurance policy to another
29 Sep 2022 (246 views)  

A policyholder consulted me. He bought a life insurance policy from company X for his daughter many years ago. A life insurance agent from company Y advised him to stop the policy when the daughter reaches 21 and switch to a new policy with the premium payable for 15 years only. 

The agent offered a discount of 10% of the premium if he took the new policy within one week.

The policyholder sent the benefit illustration for the old policy and the new policy to me for my review. 

As I was quite busy, I told him that I will reply to him in a weeks' time. He should NEVER buy a life insurance policy in a hurry. 

I analyzed both policies and found the following:

Old policy from company X
The projected cash value at age 21 is $17,180.
The premium payable for the next 15 years is $12,381.
The projected cash value at age 36 is $47,472.
Compound interest at 3% on $17,180 for 15 years is $9,585
Total gain = $47,472 - $17,180 - $12,381 - $9,585 = $8,326

New policy from company Y   
Premium payable for next 15 years is $16,725
Cash value at end of 15 years is $6,160 (average of 2 projections).
Total loss is $10,565

Conclusion  
If he keep the policy from company X, he will get a net gain of $8,326 for the next 15 years.
If he switches to company Y, he will make a loss of $10,565. 
If is obvious that he is much better off by staying with company X.

Both policies provide similar life insurance cover for the daughter. 

When the agent offers a discount of 10% on the premium, he did not state if the discount is for the first year only. The policyholder may get the impression that he will get the discount for 15 years. This is not the case.

The agent probably earns a commission of (say) 50% on the first year's premium and gives a rebate of 10% to the policyholder, i.e. he will earn a commission of 40% only.

Lesson
Never switch from one life insurance policy to another policy. You will be paying for the hefty upfront cost (usually two years of premium) all over again.

Tan Kin Lian







 


Avoid switching from one life insurance policy to another
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A policyholder consulted me. He bought a life insurance policy from company X for his daughter many years ago. A life insurance agent from company Y advised him to stop the policy when the daughter reaches 21 and switch to a new policy with the premium payable for 15 years only. 

The agent offered a discount of 10% of the premium if he took the new policy within one week.

The policyholder sent the benefit illustration for the old policy and the new policy to me for my review. 

As I was quite busy, I told him that I will reply to him in a weeks' time. He should NEVER buy a life insurance policy in a hurry. 

I analyzed both policies and found the following:

Old policy from company X
The projected cash value at age 21 is $17,180.
The premium payable for the next 15 years is $12,381.
The projected cash value at age 36 is $47,472.
Compound interest at 3% on $17,180 for 15 years is $9,585
Total gain = $47,472 - $17,180 - $12,381 - $9,585 = $8,326

New policy from company Y   
Premium payable for next 15 years is $16,725
Cash value at end of 15 years is $6,160 (average of 2 projections).
Total loss is $10,565

Conclusion  
If he keep the policy from company X, he will get a net gain of $8,326 for the next 15 years.
If he switches to company Y, he will make a loss of $10,565. 
If is obvious that he is much better off by staying with company X.

Both policies provide similar life insurance cover for the daughter. 

When the agent offers a discount of 10% on the premium, he did not state if the discount is for the first year only. The policyholder may get the impression that he will get the discount for 15 years. This is not the case.

The agent probably earns a commission of (say) 50% on the first year's premium and gives a rebate of 10% to the policyholder, i.e. he will earn a commission of 40% only.

Lesson
Never switch from one life insurance policy to another policy. You will be paying for the hefty upfront cost (usually two years of premium) all over again.

Tan Kin Lian