Policyholders who try to analyse the bonuses paid under different life insurance policies found them to be complex and inconsistent. There is no reason why the bonuses should change significantly at certain durations and differ between different plans from the same company.
Here is the explanation. Life insurance companies have been "manipulating" their bonuses to allow their agents to sell the policies on the hope of a good yield, if they keep the policies for a long, long time. The yield on the earlier durations is extremely poor. The "manipulated" bonuses do not reflect the actual investment yield earned during the year.
Here are two big shortcomings:
a) Many people will not be keep the policies for the long duration, due to change in circumstance.
b) The jacked-up bonus at the "magic" duration is not guaranteed.
Due to the low investment yield (obtained from investing in low risk bonds) and the high marketing expenses (i.e advertisments and agent's commission), the life insurance policies give a poor yield. The company has to "manipulate" their bonuses to make them appear to give a good yield at the "magic" durations.
a) Do not waste your time to understand the rationale of the bonuses. There is none.
b) Do not trust any life insurance company that has to resort to manipulating their bonuses.
Buy low cost insurance (i.e. term insurance) to protect your future earnings and invest in a low cost investment fund. Read these FAQs:
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