Thursday, November 6, 2008

Compare by numbers, not the rate

Sometimes ago I share a "Capital Guarantee Investment Link Insurance Plan" that sounds almost perfect :

. Your Investment Capital is Guaranteed to increase even at Bad times,
.  At good times, you will get all the extra returns,
.  Free insurance covers.

There were 2 scenarios shared in that post 

1) When market drops, you get back $139,200 out of the $120,000 you invest in.  And this $139,200 is paid out monthly in next 20 years.  If you run the numbers, you will discover this is equivalent to a compound interest rate of 0.75%.

That's right !  Instead of 5.8% or any big return numbers you see, the actual rate of that deal is 0.75%.

2)  Like wise, if your investment is accumulating at 6% for the first 20 years, then the whole 40 years plan return rate is actually 4.08% !!

However, don't be too negative yet.  Insurance is not All About return but its main objective is about Protection ( read this old blog ).  So if you really want to compare with a FD rate, you should deduct some amount from your saving to buy an equivalent insurance protection.

The above plan's protection is $84,000 Sum Assured.  Someone quoted me a Term Insurance of $505 for that.  So I should deduct out $505 from my $6,000 yearly saving (see Buy Term Invest The Rest method) and then see what return rate do I required in order to get paid $580 monthly from 21st to 40th year.  The return rate is 1.55%.  So its not as bad as 0.75%

Likewise, in good time, the return needed is 4.73% and not 4.08%.

If you think someone has eaten your pie, that is true but lets be fair.  These pie eaters also helped you reduce some hassles;

1. No need to seperate payment of $505 to insurnace company and then the rest to other company,
2. No need to worry about the timing of payment,
3. No need to get different quotes, different analysis from different parties

So they get paid for all these work they did for you.

And you ... your decision is whether you want to pay someone to do the job for you.  If not, then you better buckle up and do all those work yourself.  Don't ask for both world ... pay nothing and ask for all the services ...