Many people buy whole life policies for a simple reason, they want to see some money at the end of it all if they live throughout the policy. Another popular reason for buying whole life policy is that some people see it as a form of forced savings. Basically the penalty to take the money out is so much nobody in the right mind would try to take the money from insurance policy to use it.
While the conventional wisdom of using a whole life insurance policy as a form of forced savings is subject to much debate, we won’t cover that here. Instead, we will focus on how much the insurance policy costs you. Other than comparing premiums, it is important to know how much costs you are paying, that’s because
Money Put In + Returns – Costs = Savings
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Basically the money put in is the premiums you pay. Returns are the returns that the insurance company pays you. Costs are the costs of insurance such as agent commission, admin fees etc. So to compare the costs you look at 2 main columns, “Effect of Deduction” and “Value of Accumulated Premium”
The Value of Accumulated Premium is total value of both the premiums put in and the returns paid by the insurance company to date.
The Effect of Deduction is basically the costs for the insurance company to provide the insurance policy.
Deduction % = Effect of Deduction / Value of Accumulated Premium
For example in year 10, if the Effect of Deduction is $10,200 while the Value of Accumulated Premium is $36,000 then the Deduction % = 28.3%. According to Ex-NTUC Income CEO Tan Kin Lian, anything above 20% is expensive. However, in the market it would be very tough to find one that has below 20%. So the next best thing is to just compare the Deduction % between the different insurance policies.