Money…. The artificial resource that has become the basis of life. We
spend most of our lives sowing time and effort to reap cash gains. Do we get
enough of it? That may depend on the “variables” called the “needs” and
“wants”. However, the recent cry from
people, politicians and nations have been unanimous. They all “don’t have
money”. Well, with the cost of living
rising and implementation of the poorly planned GST coming to play, purchasing
penthouses and diamond rings is going to be difficult for the everyday Joe…
The thought of saving was strongly reaffirmed when we were
all educated that in order to purchase a $25 million dollar ring, one has to be
diligent enough to save since childhood. With that thought in mind, we need to
also know that merely saving it up in a bank account is not going to cut it.
With the current rate of inflation recorded at 6%, the actual value of a
person’s savings of $10,000 dwindles to a mere $
7,339 in just five years. Meaning, your $10,000 will only buy you products
worth $7,339 in 5 years. If you place it in a fixed deposit, the dwindling
effect is cushioned a little as it drops to $8587. Sure, you are better off
keeping it in the fixed deposit. But that is the same as keeping someone who is
medically critical from the needed medical aid for the fear of the medical aid
itself killing them. Your money needs professional attention… Don’t deprive it.
Options for making one’s money grow are aplenty! But whether
or not they are applicable to the current trend is subject to questioning. It is one such outdated option that what i
would like to highlight in this article. The ENDOWMENT PLAN. Of course, now they come with much fancier
names such as the “Guaranteed Cash Back Plan” or “Cash Promise Plan”. These are
normally promoted and offered via insurance companies. One such company that is
all set at promoting this is Hong Leong Assurance (HLA). You do have almost all
the insurance companies offering such schemes. However, the recent blatantly
misleading information fed by the representatives from HLA has what has caught
my attention. And I have a gut feeling that many reading this article, may have
actually invested in this particular product.
Well, let’s have a mini postmortem shall we?
The product promises:
- 1. Guaranteed cash returns (annual cash back and one lump sum at the end of the tenure)
- 2. Insurance coverage
- 3. Investment returns
Rather than putting it into mere words, I have made a table
and then gone on to giving a step by step explanation. The following is based on an actual quotation
tabled to me. Observe:
TABLE 1
|
Year
|
Premium (MYR)
|
Yearly Cashback (MYR)
|
Death Benefit
(MYR)
|
Total & Permanent
Disablement (TPD) (MYR)
|
Surrender Value ( A) (MYR)
|
Surrender Value (B)
(MYR
|
|
1
|
15,221
|
3100
|
116,250
|
15,221
|
7,060
|
6,817
|
|
2
|
15,221
|
3100
|
113,150
|
30,442
|
16,355
|
15,740
|
|
3
|
15,221
|
3100
|
110,050
|
45,663
|
26,711
|
25,545
|
|
4
|
15,221
|
3100
|
106,950
|
60,884
|
38,994
|
37,041
|
|
5
|
15,221
|
3100
|
103,850
|
76,105
|
52,217
|
49,220
|
|
6
|
15,221
|
3100
|
100,750
|
91,326
|
66,258
|
61,937
|
|
7
.
.
.
|
0
|
3100
|
97,650
|
0
|
67,270
|
61,583
|
|
25
|
0
|
3100
|
41,850
|
0
|
98,171
|
52,119
|
|
Total
|
91,326
|
77,500
|
41,850
|
0
|
98,171
|
52,119
|
Scenario A
Based on what they
said:
1) You would need to pay for only 5 years and
wait for your money to grow for the next 25 years.
2) The annual cashback of MYR 3,100,
withdrawable every year, amounts to MYR
77,500
3) Surrender value A or B based on market
performance. But Surrender Value A is what is normally highlighted.
Scenario B
What the table
actually shows is:
1) What you paid for 5 years will be paying
for insurance charges, commissions, service charges, policy charges and etc.
2) You will be collecting MYR77,500 in total
via the annual cashback.
3) TPD cover stops at year 6.
4) Insurance reduces as years progress (by MYR
3,100). Meaning, should the policy holder, for example, kick the bucket in year
20 (before the maturity of the policy), he will be receiving either
a. A : MYR 89,901 (if the market performs well)
or
b. B:
MYR 58,290 (if it performs not that well).
Therefore the total collection would be the MYR 3,100 x 20years = MYR
62,000 + The death benefit of either A
or B.
If A: MYR 62,000 + MYR89,901 = MYR 151,901 and if B : MYR 62,000 + MYR 58,290 = MYR 120,290
5) Total return for 20 years on scenario is A: 66.33% and B:
31.72%. So the simple average for 20 years is A: 3.317% per year and B: 1.59%
per year.
6) Should all be well and good for the 25 year
tenure (which we all hope for), the policy owner would receive either
A:
MYR 98,171 or
B:
MYR 52,119.
So,
with the annual collection of MYR3,100
which he had been receiving, the total growth would be:
a. Scene A : (MYR 3,100 x 25 years) + MYR
98,171 = MYR 175,671.00
b. Scene B : (MYR 3,100 x 25 years) + MYR 52,
119 = MYR 129,619.00
7) Now, given that you have paid RM 91,326 in
total in premium for the first 5 years, the actual total return on your premium
is on A = 92.36% and B = 41.93%.
a. Simple average:
i.
Scene
A = 3.69% per year for 25 years
ii.
Scene
B = 1.68 % per year for 25 years
So in short, this
investment provides marginal yet expensive cover and market returns that are
substantially low. With only being able
to grow your money at 3.69% per year for 25 years (although markets have been
giving substantially more in such long periods), nobody can afford that diamond
ring that he/she dreamt of since childhood. So think wisely before investing. After
all, my team and i do provide non-obligatory investment advisory services.
Written By,
Ashveen Chakravarthy
Sekaran
DEC 10th,
2014
P.S. Just in case you
are planning to save up to buy a $25million ring in 50 years, and let us say
there is an investment that is giving 10% returns per annum (we have been
giving more), you would need to save $ 1,443.05 per month. So, start saving ;)
