FAQ: Calculating the Yield

1. If you have a life insurance policy and you do not need the cover any more, you can keep it as an investment if the future yield is better than other types of investments. If you wish to consider it as an investment for the next five years, you can calculate the yield by asking the insurance company to quote you the cash value now, cash value in 5 years time, and the premium payable for the next five years. If the yield is more than 3% per annum, it is appropriate to keep the policy as an investment.

2. You can compute the yield accurately by using a financial calculator.

Example:
Period: 5 years
Amount now: $5,000
Annual saving: $1,200 for 5 years
Accumlated amount in 5 years now: $12,000

Annual saving invested at beginning of year
Computed yield: 2.23% p.a.

Annual saving invested at end of year
Computed yield: 2.58% p.a.

3. If you do not have a financial calculator, you can use a rough method.

Total invested at start of period: $5,000
Total invested at end of period: $11,000
Average amount invested: ($5.000 + $11.000) / 2 = $8,000
Gain for period: $12,000 - $11,000 = $1,000
Yield = $1,000/ $8,000 / 5 years = 2.5% per year

This method works for short durations, i.e. up to 5 years. The difference betweens larger for longer duration.