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FAQ: Reduction in Yield
If you buy a life insurance
policy, you will receive a policy illustration (comprising of
several pages) that shows many figures.
You can look for an explanation of the following:
1. Total distribution cost
2. Effect of reduction
3. Reduction in yield
All insurance companies are required to provide them in a common
format.
One key figure that you should study is the reduction in yield.
It shows how the total distribution cost and other charges
impact on your yield.
Here is an example of two plans, for 25 years, offered by the
same insurance company. The gross investment yield is projected
to be 5.25% (not guaranteed).
| |
Reduced yield |
Reduction in yield |
| Endowment policy |
4.61% |
0.64% |
| Endowment (new) |
3.74% |
1.51% |
If you save $300 a month for 30 years, the difference is as follows:
| Net yield |
Total on maturity |
| 4.61% p.a. |
$166,600 |
| 3.74% p.a. |
$147,500 |
| Difference |
$ 19,100 |
The new product provides an annual payback of 5%
of the sum assured from the second year. It has high distribution cost, which
reduces the yield.
Lesson: Buy simple products that offer a better
yield.
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