Interest Rate of Automatic Premium Loan (APL)
The first thing we need to concern about is how many interest rate of the loan. Normally, it is quite high, more than 6%, for example. Besides, the policy will only valid with the condition that the cash value must always more than the payable loan.
For instance, a total of $3000 have been paid for 6 years. Then the insurance will keep active as long as the amount of loan (automatic premium loan) is lower than the cash value.
So, what you will see is, in year 7th, the cash value is $3000 + $500 = $3500. The $500 is loan from the company. So, my account will got payable loan of $500, which is less than my cash value of $500 in year 7th.
However, please bear in mind that normally the interest rate of more than 6 percent will be charged, compoundly, annually. In other words, eventually, when the total amount of interest charges more than the sum of cash value,
Never buy this kind of insurance.
This is because insurance is used to hedge the potential lose in our life. For instance, if you have a duty to pay monthly instalment of your house of amount of 500K. Then, you should have an Personal Accident insurance with sum of assured of at least 500K to hedge the risk with very low premium annual. Of course, the premium will gone if everything is fine as usual.
I always believe that insurance should always be its only usage: Hedge our risk, instead of the so-called investment or saving.
If you plan to saving, said, 500K for your children, then you should buy an insurance of 500K with few hundred premium annually, then use the remainder money for investment in stock market (if you have time to do homework), buying fixed asset or simply putting them in fixed deposit to earn few percent interest. The true is, the return will be almost same as you put your money in saving insurance annually, or buying an Personal Accident insurance plus fixed deposit in Bank. The advantage of the latter is you have enough freedom (liquidity) to allocate your money from time to time to suit your need. Buying saving insurance, is a big comment, and it is not worth to take such risk (terminate insurance immature due to financial crisis) in our life.
Do see some explanation of IRR in this blog then you will understand that actually, buying a Personal Accident Insurance plus self saving in FD has almost same return and protection as buying a saving insurance. So, why you want to take such risk of buying a saving insurance?
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Written by: Xaivier Chia