I’m sure many of us have a few bank savings account on our hand. Some was opened by our parents to deposit our red packets etc, and hence when we were born. Some was opened when we started working, and that being said very seldom we close a savings account. We stick to a few savings account, and become a “loyal” customers of that few banks. The problem is the bank doesn’t really appreciate your loyalty by looking at how long you have opened your account with them. They look at how much you have in the account, and the bigger pot you have, the better service they shall render. That’s why there’s priority banking, and private banking etc.

However, my post today shall not debate about what our bank should do for the customers. They won’t change anyway! What I would like to discuss is treating your life insurance policy as a bank savings account too. I’m sure many insurance advisers did talk about it before, but it’s all very surface most of the time. Hence I’m going really deep with you to showcase you on why it’s indeed a savings account and how it can work for you.

Treat life insurance policy as a bank savings account. This statement has 2 parts; the life insurance policy, and the bank savings account. Let’s define it properly so that we are all on the same page. When I said life insurance policy, I refer to any Participating policies issued by the insurer. It can be a long term endowment policy. It can be a whole life insurance policy. It has to be participating policy.

As for bank savings account, I refer it to a facility which can store my money and future money (from my future income and savings), provides me with decent interest rates, and lastly, with withdrawal services. Who would want a facility to store your money and not able to withdraw it out? That’s our CPF account by the way, but I’m not going talk further on it though.

If you buy a life insurance policies, in the short term, it’s not going generate much interest rate for you as the cost of writing the policy is being incurred in the first few years of the policy. That’s the reason why if you terminate a policy in the first few years, you will make a substantial loss on the amount you pay. This is how it works, but once you cross the critical line, say on the 10th year or 20th year of the policy, this insurance policy is going to generate a super strong compounding interest for you. Including the cost incurred at year 1 onwards, the overall yield of a life insurance policy can range from near 2.5%-4.5% p.a if you were to keep it for beyond 15-20 years. I know the yield is not attractive at all if you were to compare it with investments, but please, I’m not talking about investment at all. We are comparing it against our normal savings account. Your bank savings account generate you a 0.05% interest, and if the life insurance policy gives a 3% p.a return that’s a whopping 60x difference! You see, the life insurance policy didn’t give a super high return, it gives decent return. It is your bank savings account which give pathetic return which make the life insurance policy attractive!

The only caveat of this life insurance policy is the initial cost which you are going to incur. If you can pass through that period, you are going to love this policy, and what you have inherited is a policy which will work for you for life. That is the reason why I feel that everyone of us should treat life insurance policy as a necessity, just like food and house as shelter. If you treat it as necessity, you never will give up paying the premiums. Hence you won’t lapse the policy and incur cost. Why do people stop paying the premiums? It happens usually when someone have a temporary cash flow issues. You may have lost your job. You may have incurred some one time big expenses. Whatever your reasons, I do have answers to them. However that’s besides the point because if you treat them as necessity, even in your lowest point of your life, you still will pay for the premium. Never give up on this policy which will eventually work hard for you. Not yet including the coverage which they provide, the money in the policy work at least 60 times harder than the money in your current bank account.

After a good 15-20 years, you should have sort of break even on the premiums you have paid. There’s no more cost attached to the policy now. Your money in this policy now starts to compound it at 4-6% p.a. The cash value in the policy (we call it surrender value) now should be more than the premiums you have paid. Hence, the returns are guaranteed to surpass the returns if you were to put in the bank. You should never close (terminate) this policy to take the money out. If you do so, do remember that you are going to lose the future compounding effect by the policy. Worst is you terminate it, and choose to pay another policy. You incur another new set of cost from the new policy. Never do that, unless your priority changes.

How can we take out the money and yet enjoy the compounding effect then?

The moment you accumulate cash value in the policy, automatically, a loan facility will be opened for you. Yes, the insurer will open a loan account for you for every Participating policy you have with them. I love this facility, and in fact many people know but never understand how it works. To us, a loan is bad. Hence they avoid it. Even the insurance agents didn’t mention much about this too.

Generally, the insurer allows you to borrow up to 90% of the cash value which you accumulate in the policy. Let me emphasise this to you; You didn’t take out your cash value from the policy. The insurer lend you money as you pledged your loan with them. If you surrender the policy, they pay you back the cash value minus the loan outstanding. It’s as simple as that.

Why do we want to borrow money when we can surrender the policy?

Refer to my previous articles on how the rich borrow money to be richer. I shall answer this question with a question. Why not, and why would you want to sell your cow which is guaranteed to give you increasing milk in future. I don’t want to sell off my milking cow and incur cost to buy little calves and rear them again.

Fear comes from the failure to understand

Sam

Let’s try to understand this loan facility. It’s really interesting. All along it exist in every participating life insurance policies. It’s not new. It’s been there for you to use all these years. Why I really like it is

1. You can take a loan from the insurer, while your cash value of the policy continues to grow. It’s a separate account!

2. Zero processing fee when you take this loan.

3. Zero redemption fee if you pay it off early.

4. There’s no repayment schedule. You set your own schedule. You can pay it back 1,3,5 years later. You can don’t pay it back too, but of course loan interest will keep on compounding as well.

The thing is, what is the purpose of the money required? House renovation? Luxury holiday? Car downpayment? House downpayment? How about for investment purposes? Before you tap on this loan facility, you want to make sure that your bank account really has no money then you start to borrow from the insurer. If you have money in your bank account, use those money first. After that, take a loan from the insurer. Never terminate your life insurance policy. Don’t sell away that milking cow.

For whatever reason you need the money, the fact is this, the following month, your salary will credit to your bank. You are going to save money again. You then use the money to pay off the loan. I know you may think that if you pay it off, your bank account will be empty right? Didn’t I say that this insurance policy is a savings account as well? Every time you feel broke as you look at your bank account balance, do login to your insurer policies account. You actually have a savings account there. You can take money from there if you need it. You want to park your money there as it’s guaranteed to work 60x more hardworking than the money in your normal bank account.

I know what I’m sharing with you now might seem abstract. For those who have life insurance policies, go and take a look at your policy values now. Look at the future values as well. You are going to realise that this “bank” of yours is going to work harder than the other bank. If you understand this concept, you are going to start parking your money in insurance policies instead. It will take years, hence be patient, but I can guarantee you that you are going to reap the fruits of the labor subsequently.