# LCF Answers Readers’ Question

Question 1
In my previous post on calculating total insurance needs, a reader remarked that by liquidating all Mr Lim’s assets, it essentially means there is neither a house nor liquid cash for his family to stay and use after his death.This is correct. Therefore, if Mr Lim does not want the house to be sold and wants his wife to still have liquid cash in the bank upon his demise, he should omit both his house market value and cash from total assets computation.

Therefore, total assets available to settle his current liabilities is now equivalent to \$ (890k – 500k – 10k) = \$ 380k.

His insurance needs to cover for the shortfall is now equivalent to \$ (1210k – 380k) = \$ 830k.
Question 2
Using Internal Rate of Return to evaluate an annuity plan is the right way to know your effective annual return.
However, when it comes to endowment plan (whose popularity is overshadowed by unit trust nowadays), you do not need to use IRR to calculate the return. It is actually a lot simpler.

Assume a 20 years endowment plan, with guaranteed maturity sum of \$ 100k. The annual premium is \$ 4k, to be paid at the beginning of every year.
All you need to do is to use the RATE formula and key in the values as below:

=RATE(20,-4000,0,100000,1)

Your ROI is 2.08%.

Use IRR formula only if there are series of uneven cash inflows and outflows.
For endowment plan, there is a series of even cash outflows and only single cash inflow at the end of the period. Therefore, use the RATE formula instead.

I hope this helps. 🙂

Cheers,
LCF on Personal Finance Malaysia