Why you should pay your insurance premium in the shortest period possible

Not all insurance policies are created equal, with the number of year u pay premium playing a big part.

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This article is for those looking to maximise the financial returns on their insurance policies by understanding how a shorter premium term affect insurance policy payout.

The premium term on your insurance policies matters (More than you think)

The number of years you have to pay premium greatly affects the financial returns on your insurance plans. This is by no means valid only for endowment policies and saving plans, but all insurance policies in general.

For the purpose of comparison, we look into 2 regular premium endowment policies and saving plans with the same maturity in 25 years time. The primary differentiating factor being one of the insurance policy requiring only 10 years of premium, while the other requires premium payment all the way to maturity.

How can InterestGuru.sg do a fair comparison when no 2 policies are the same?

Skip to the next section if knowing how we get to do a fair comparison does not interest you (Not recommended if you are here to understand how insurance premium works).

Even among insurance policies from the same insurance company, the following affects the final returns of your insurance policies:

  • Premium amount – Cash amount you have to pay for the insurance policy on a yearly basis
  • Premium Term – Number of years you have to pay the premium amount
  • Policy Term – Number of years to the maturity of the insurance policy
  • Insurance riders – Premium on riders for insurance does not get added to your policy cash value
  • Guaranteed Cash Value – The Guaranteed cash amount at the end of your insurance policy
  • Non Guaranteed cash value – The Non Guaranteed cash amount based on projected investment returns generated by the insurance company
  • Partial withdrawal/ cash benefit features – Option for withdrawal affect your final return (regardless if you use it or not)

Read about: Understanding your insurance policies (part 1 of 2)

Read aboutUnderstanding your insurance policies (part 2 of 2)

For the purpose of this comparison, we select 2 endowment and saving policies with the primary differences being the Premium Tenor.

Where do the financial values for the selected endowment policies and saving plans come from?

Comparison data extracted from CompareFIRST.sg, a financial portal jointly owned by MAS and CASE. To ensure a fair comparison, we took 2 policies from the same insurance company, Aviva.

The selected products for this comparison are:

Aviva – Aviva MyWealthPlan

  • Premium Term: 10 years (Limited premium term)
  • Policy Term: 25 years
  • Premium amount: S$ 4,992
  • Total Premium for policy: S$ 49,993
  • Insurance riders included for the comparison of this policy: No
  • Partial withdrawal/ cash benefit features: No

Read aboutAviva MyWealthPlan Review

Aviva – Aviva MySavingPlan

  • Premium Term: 25 years (Regular premium term)
  • Policy Term: 25 years
  • Premium Amount of S$ 2,495
  • Total Premium for Policy: S$ 62,360
  • Insurance riders included for the comparison of this policy: No
  • Partial withdrawal/ cash benefit features: No

Read aboutAviva MySavingPlan Review

Additional note: Aviva MySavingPlan is part of our 3 best Regular premium to maturity endowment policies and saving plans

Care to guess which policy offers the highest returns after 25 years?

With both insurance policies having the same number of years to maturity, care to guess which offers the best value for your money?

Results in 3,2,1.

Here we go.

 Aviva MyWealthPlan (10 years limited premium)

Total Premium paid: S$ 49,993

Premium paid for: 10 years (S$ 4,992)

Years to maturity: 25th year

Guaranteed Cash value: S$ 71,000

*Non-Guaranteed Cash value: S$ 37,914

Projected Cash value (Guaranteed + Non-Guaranteed Cash value): S$ 108,914

Different between Projected Cash value and Total Premium paid: S$ 58,921

Aviva MySavingPlan (25 years regular premium)

Total Premium paid: S$ 62,360

Premium paid for: 25 years (S$ 2,495)

Years to maturity: 25th year

Guaranteed Cash value: S$ 69,500

*Non-Guaranteed Cash value: S$ 33,686

Projected Cash value (Guaranteed + Non-Guaranteed Cash value): S$ 103,186

Different between Projected Cash value and Total Premium paid: S$ 40, 826

 The winner: Aviva MyWealthPlan (In case it is not clear to you)

Aviva MyWealthPlan with 10 years limited payment term, beats Aviva MySavingPlan with a regular premium term of 25 years. Both policy maturity on the 25th years, with Aviva MyWealthPlan having a lower total premium and higher Guaranteed and Non-Guaranteed cash value. 

Fyi, Aviva MySavingPlan is ranked #1 on CompareFirst.sg based on Regular premium to maturity for saving plans and endowment policies. It is by no means an inferior insurance policy, which is why it is our pick for the 3 best Regular Premium saving plans and endowment policies in Singapore.

Did the final result surprise you?

It should be clear from the illustration that a short premium term allows for better compounding returns on your insurance policy. This applies to all insurance plans and policies such as whole life policies, investment-linked policies as well as retirement plans and annuities policies.

Read about: Missing out on compounding returns?

The difference in cash values differs depending on the type and category of insurance policy itself. To compare individually policies base on your age, insurance and financial needs will take us a decade for all possible combination for all ages, insurance coverage, riders, policy benefits, multiplier effects and other features.

However, you can always use our CompareNOW to let our partnered Independent Financial advisors work on your financial and insurance needs.

But why was a longer premium term recommended by my financial advisor for my insurance policies?

It could be a budget issue on your end, it could be a higher sales commission for signing up a longer premium term, it could also be the stars did not align properly or a thousand other reason or motives.

Read about: No budget for financial planning?

InterestGuru.sg is not here to judge, we are here to be your one-stop financial comparison portal.

And finally, for the naysayers that will claim that spreading out the premium over a longer period allows you to invest part of your money where else. We end this by saying by paying off the premium earlier and paying a lower amount, you can invest a higher overall balance towards your other financial goals as well.

Read about: How can I accumulate a million dollar (Realistically)

So please,  don’t try to troll us on that.

For a proper guide on what insurance policies are important and what can wait, read where do I start with financial planning?

Compare before you commit

Before committing to an insurance policy, it certainly pays to make an effort to compare. Why regret only years later, when you find out that you are not getting the best insurance policy available for the premium paid?

Even worse, to know you can compare insurance policies here, 100% free of charges using our CompareNOW feature. We may even assign one of the partnered Independent Financial Advisers to work on your enquiry at no cost to you.

We know you find it too troublesome as well, so you can reach us by simply dropping a message here.

 

Learn something valuable today? 

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*All Non-Guaranteed Cash value for this comparison are based on projected investment returns of 4.75% by Aviva.

Disclaimer: InterestGuru.sg is not a bank, financial institute or an insurance company. We operate as a financial portal with the goal of promoting financial awareness and knowledge to our readers. The above does not constitute as financial advice and InterestGuru.sg shall and will not be liable for any losses or damages resulting from the above information.