One insurance company is able to sell a lot of life insurance policy with a cash payout every 2 or 3 years. Their agents were able to convince the customers about the attraction of this policy.
Actually, this policy provides a poor return to the policyholder.
This is how it works.
Assume that you can buy a whole life policy for $100,000 by paying a premium of $200 a month. This special policy ask you to pay a higher premium, say $300, in order to enjoy a cash payout of $2,000 every 2 years.
You may not realise that you are actually paying $2,400 in 2 years (ie $100 more each month) to get back a cash payout of (say) $2,500. The return on this additional payment is small, or may be negative. This is because a portion of the premium is used to pay commission to the agent.
The agent is very keen to sell this special policy because they can earn a higher commision.
The customer is better off by keeping to the basic plan and saving the difference in a bank account to earn interest.
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