30 June 2014

Whole Life Insurance - a good deal or a dead deal?

My wife has a whole life insurance policy for a sum assured of $35,000 for which she has been paying $613.80 a year.  She started this policy as a teenager at a very young age of 18 and the policy has been in force for the past 29 years.

According to the latest projection from the insurer (as checked from its online portal), the projected surrender value at age 65 is $85,099. This includes both the guaranteed and non-guaranteed components.

I worked through the maths and the Internal Rate of Return (IRR) worked out to be 3.97%.

Its cash value, if the policy was surrendered now, is estimated to be $29,810. Suppose she cashed out this sum and invest at a 6.5% return, and she continued to contribute the annual sum $613.80 to this investment, she could achieve an IRR at age 65 of 4.9% for a sum of $112,503.

At 5% returns, the IRR would be 4.12%, $89,009.
At 6% returns, the IRR would be 4.64%, $104,058.
At 7% returns, the IRR would be 5.15%, $121,624.
At 8% returns, the IRR would be 5.65%, $142,108.
At 9% returns, the IRR would be 6.15%, $165,968.
At 10% returns, the IRR would be 6.63%, $193,730.

My assessment is that 6% to 9% investment return is in fact achievable with a well considered dividend-yielding value investment in SGX shares. Not unlike my fantasy soccer team.

The possibility of generating $104,058 to $165,968 by the time she is age 65, and yielding dividends of 4% would imply a passive income in the range of $4,162 to $6,639 per year.  That's $347 to $553 per month.

The current cash value at $29,810 is close to the sum assured of $35,000. She is a housewife and there is really nothing that she needs to protect with this sum of money.

Worth considering?

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