On 31 August 1995, I was committed to a whole-life insurance policy from Prudential Assurance called “PruLife with Profits”. This was 24 years ago.
Sum assured is $50,000
Premium is paid annually at $1,560
Policy start date: 12 September 1995
I have already paid $37,440 on premium.
Because the policy participated in reversionary bonus every year, the reversionary bonus accumulated to date is $13,877.
Now that I am 62 years old, I was looking at terminating this whole-life insurance policy.
The latest Gross Surrender Value as at 30 June 2019 is $58,311.
On the basis of this information, my rate of return of yearly premiums with a cash surrender value of $58,311 is 3.44% per year.
I treat this whole-life policy as a form of forced savings every year, setting aside $1,560 each year. At the end of 24 years, I could get back a lump sum of $58,311 giving me a rate of return of 3.44% per year.
If I do not terminate this policy, I will continue paying yearly premium of $1,560 until year 2042 (another 23 years) if I am still alive at 85 years old. The death benefits on this policy will go to my beneficiary.
To terminate or not to terminate? I look at two factors.
- Do I need to leave behind something for my daughter or my wife a sum equivalent to the death benefit in the policy? This death benefit is expected to be higher than the cash surrender value.
My daughter and my wife are financially independent and therefore would have less need of my death benefit on the policy.
- When the proposal was first floated to me in 1995, the cash surrender value schedule was way too optimistic than the actual cash surrender value as of today. The rate of return based on the proposal in 1995 was 5.34% per annum. The current rate of return is now at 3.5% per year (based on the 25 year mark).
This was whopping 184 basis points below (1.84%) now. The current nominal interest rate and investment return were really below those in 1995. If I were to consider inflation rates over the 24 years, the real rate of return will be lower than 3.5%.
Going into the future, the investment environment is getting tougher. The investment rate of return would not be enticing for me to hold on to the insurance policy. In addition, I have to continue to pay yearly premiums ($1,560) to keep the policy going.
I would rather surrender the policy and get the money now for my own use or to invest this money on my own.
Copyright © 2019, limkimtong for Living Investment
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