Very often consumers do not want to buy insurance because they perceive it as a waste of money if there was 'no claim'. Therefore, the financial industry invented the insurance policy with 'premium refund'.
Recently, the Business Times reported that a OCBC Mortgage Protector Plus, a mortgage reducing insurance with a premium refund, sold very well for over the last 4 years. According to the newspaper report, the product was well received for the first 9 months of this year despite the slowdown in property market. So, how does such product work?
According to the report, for a 40 years old non-smoker, a $1 million sum assured 20 years coverage cost $5,847 a year in premium. However, a plain vanilla mortgage reducing term insurance (with no premium refund) would cost $1,750 a year. If nothing happens at the end of the coverage period, the entire premium is refunded. I assume the premium is refunded without interest. This works out to be 20 x 5847 = $116,940. However, if something happens during the coverage period, the protection value is paid out and I assume none of the premium already paid is refunded.
Actually, this is a ‘bundled’ product in which it consists of a term insurance and a saving component. The saving component premium is 5847-1750 = $4,097 a year. The pure insurance cost $1750 a year(given in the newspaper article). Assuming the ROI of the saving component is 3.3%, the saving component would have grown to $116,940 which is equal to the total premium paid over the coverage period.
Since it is actually a two-in-one product, why not buy the two products separately? If you buy the two product separately – say a plain vanilla mortgage reducing term insurance and a 20 years endowment and if anything happens during the coverage period, both the protection amount and the endowment will be paid out. If nothing happens during the period, the endowment would have a maturity benefit equivalent to the total premium for the two policies. In other words, you can have the cake and eat it all.
This is another example in which financial education is power.
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