Fixed Deposit could be more Profitable than your Endowment Plan (Revelation Series Episode 2)

(Last Updated On: 26/01/2014)

This episode 2 we are going to instill awareness on the options you have when you want to save for a major financial goal in the future. Like child education. The first come to mind is endowment insurance policy or savings plan. These plans are sold to non-savvy public who buys the idea of having a 2 in 1 feature in an insurance policy – Protection and Get back some cash – very good right? Kill 2 birds with one stone. They normally have the characteristics below:

  1. Some protection* (coverage) for death and permanent disability
  2. Runs for a specific time (say, 20 to 30 years, but very rarely, until age 99). Also known as maturity period
  3. Payout the sum assured when covered event occurs or at the end of maturity period, whichever comes first
  4. Guaranteed interim cash payout at regular intervals as defined in the policy
  5. Non-guaranteed bonus payout at end of maturity period

Save-MoneyThe reason I state “Some Protection” is because you could get a better pure protection by the same premium. In other words, you could get a much larger sum assured by paying the same amount of premium for an investment-linked or term policy.

When there is cash outflow (you paying premiums) and cash inflow (interim guaranteed cash payout and the basic sum assured payout at the end of maturity period), there is only ONE WAY to determine the “investment return” of such plans, in percentage.

That method is Internal Rate of Return (IRR).

After we get the IRR, then we only can do apple-to-apple comparison with investment returns, like FD rate of 3%.

Watch this video, but to simplify thing, if your IRR is less than Fixed Deposit rate, it means this plan make less money than Fixed Deposit rate over the same period of time. Capisce?

Lesson today is, while these kind of plans appear to be providing both protection and income – killing 2 birds with 1 stone, NOT every kill-2-bird-with-1-stone stuff is good. The reason is simply, for the price you are paying – you are neither getting sufficient protection nor getting sufficient return for your money.

Therefore, whenever you are being presented with such plans, just ask 2 things:

  1. What is the IRR
  2. …and IRR should only be computed taking into account the guaranteed cash payout (whether interim or final).

Don’t give a damn the non-guaranteed bonus because it is NOT something insurance company, your agent and any advisor can guarantee that. Skip the marketing part, the projection or any “number dressing.”

Click here for Episode 1 of Revelation Series

This Post Has 14 Comments

  1. Thank you for your kinds words. There’s no easy and direct answer to your question because every family is unique. If you are serious in getting proper advice, do check out our advisory site at – https://askcf.com/join16/

  2. Hello sir thankyou for your valuable information! Could you suggest some education insurance protection? What is the best way to save for my children future education as well as have some protection in mind incase something such as death or tpd happens to me.

  3. Hi Nitin, 12k premium a year is really high. I cannot recommend anything or help you unless I see your policy. Drop me a mail – admin [at] howtofinancemoney [dot] com

  4. Hell sir , i have a suggetion about my BSL traditional hollife insurance policy in 2012 of primium 12000 /annum for 19 years term , should i surrender this policy , because i need good return im future ? Please suggest me that i surrender and invest where i will get good return?

  5. Yes, I sent to the wrong email previously. Thanks

  6. Hi CF , Have you received my mail ?

  7. CF,
    Thanks for sharing this value information with me. Good job.

  8. Hi doc, losing money when surrendering after 1 year is NOT too bad. I have clients who only realized this after 5 or 6 years. Not easy, it is painful to lose half of the sum you paid when you surrender the policy.
    Ha ha, did you watch Dark Knight? The ending goes along the line of “he’s a hero Gotham deserves, but not the one it needs now”. But seriously, my colleague are also independent advisors which means, we DON’T normally recommend this kind of plan unless the client are aware of what I highlighted here and still insist to apply for it.
    Honestly, we are the bane for insurance agents. Agents hate us.

  9. Thanks Steve! Yea, most people just don’t know how to use the right method to compare the returns vs other investment/savings option 🙂

  10. Thank you for the simple analysis but very powerful.

  11. Hi,

    I fell into the exact same ‘trap’ 1 year ago. Lost almost half of the premium paid when discontinued… Won’t your colleagues kill you for disclosing this stuff? Haha, wish i knew earlier. Thanks for sharing!

  12. Another excellent article.

    I have always believed this to be true and you have confirmed it.

    Keep it up. 🙂

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