(Taken from moneysense.gov.sg)
Moneysense has a excellent explanation of the benefit illustration but I thought it would be good to explain on how are the numbers are derived.
This benefit illustration is an example of a 15 years regular premium participating endowment policy. As you may know, the premiums after accounting for the expenses will go into a participating fund or in short, a par fund in which the insurer will manage this fund to in order to grow it. This participating fund is also used for payouts to those who make claims on their policies.
For this benefit illustration, the investment return is assumed to be at 5.25%. The surrender value is the amount which you will get back if you terminate the policy. And this surrender value is made up of 2 components, the guaranteed and the non-guaranteed portion. Once again, the non-guaranteed portion is subjected to the investment performance of the fund and this is not guaranteed while the guaranteed portion is the portion which the insurer is obligated to give you back.
End of 1st year
If the entire premium paid is invested,
$3814 * 105.25% = $4014
Since the surrender value for the end of 1st year is zero, you will lose $4014 if you surrender the policy. This figure corresponds with the figure given under the effect of deductions.
End of 2nd year
Premium paid for 1st year is invested for another year,
$4014 * 105.25% = $4225
Premium paid for 2nd year is invested.
$3814 * 105.25% = $4014
Total return for 2nd year,
$4225 + $4014 = $8239
Since the surrender value for the end of 2nd year is zero, you will lose $8239 if you surrender the policy. This figure corresponds with the figure given under the effect of deductions.
End of 3rd year
Premium paid for 1st year is invested for another year,
$4225 * 105.25% = $4447
Premium paid for 2nd year is invested for another year,
$4014 * 105.25% = $4225
Premium paid for 3rd year is invested,
$3814 * 105.25% = $4014
Total return for 3rd year,
$4447 + $4225 + $4014 = $12686
Since the surrender value for the end of 3rd year is $6766, you will lose $12686 - $6766 = $5920 if you surrender the policy. This figure corresponds with the figure given under the effect of deductions. Notice that the surrender value of $6766 consists of the guaranteed portion of $6494 and the non-guaranteed portion of $272.
For the remaining years, one can use a spreadsheet to work out the numbers since it is quite repetitive.
There are a couple of things you should take note when it comes to the benefit illustration. The first thing is that you should always take the projected investment return with a pinch of salt. Insurers may have a tendency to use a higher projected investment return to make the numbers look nicer. As such, it is always prudent to ask yourself if the projected investment return is realistic. That is because, such a plan represents a long term financial commitment and it may be detrimental to your financial plans if the insurer fails to meet the projected returns down the road. Perhaps, the easiest way is to look at the guaranteed amount of the surrender value since this is the amount that the insurer must give it to you if you terminate your policy. In this case, the guaranteed portion of the surrender value is always less than the total premiums paid. Neglecting the time value of money, you may have to think for yourself whether this policy is a good one.
Another thing is that the death benefit in endowment plans is likely to be not enough to cover your insurance needs. If you have a few dependents who depends on your income to survive, a death benefit of a few grands will probably be enough to last them a few years only. As such, you cannot use such plans to cover the needs of your dependents in the event that you pass away.
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With regards to last paragraph of ( Another thing is that the death benefit in endowment plans is likely to be not enough to cover your insurance needs), please note that Endowment Plans are not meant to provide huge death benefits in the first place.
ReplyDeleteAlways check with your insurance adviser or planner, which are the relevant plans that meets your needs.