10 April 2012

Insurance Saving Plan: Guaranteed Returns ( >4.25% annually) after Pay for 6 or 10 Years Premiums Only

Recently, I helped my friend to analyse her Saving Plan Policy (Insurance plan, of course) sentence-to-sentence without consulting those conflict of interest agents. Based on my analysis, she find out that this saving plan is not the one she wanted to buy initially, even though she has paid the premium annually for more than 7 years. I always tell my friends that we should always be neutral from any news or explanation from other people so that we can make better decision without biases. Let me use a simple dialog to explain my statement based on my previous experience and observation related to insurance saving plan.

Dialog 1:
Agent: This saving plan provides more than 4.25% return annually.
People: It sounds good. Is the return guaranteed?
Agent: Yes, the 4.25% is guaranteed and payable to you annual.
People: Nice. This is what I want.

Comments 1:
Yes, what agent told the people is 100% correct. But it is just the part of the story. First, we need to consider how much is the 4.25% return annually after I paid $10,000 annually for ten years or total of $100,000?  The answer is the 4.25% return can be based on the Sum Assured of the Policy instead of the total money you paid annually. Therefore, if the sum assured is only $50,000, for example, then the return is only 4.25% of $50,000.

Dialog 2:
Agent: This saving plan is only need to pay for six years (or ten years), after that, you will receive the return annually until 87 years-old.
People: It sounds good. Are you sure I only need to pay for 6 years (or 10 years), then I can start receive return annually until 87 years-old?
Agent: Yes, after 6 years (or 10 years), your saving plan already have enough Cash Value to sustain your policy.
People: Nice. This is what I want.

Comments 2:
Again, what agent told the people is 100% correct. HOWEVER, it is just the part of the story, again. First, there is not such a thing that written in a policy, black and white, about premium is payable for 6 years (or 10 years). If you read your policy carefully, premium is payable annually, until the maturity date of your policy or death benefit is exercised.

So, why can I say "what agent told the people is 100% correct" while point out that "premium is payable annually, until the maturity date of your policy or death benefit is exercised"? The answer is covered by APL.

Automatic Premium Loan (APL)
Firstly, I must admit that Automatic Premium Loan is good when the people face financial stress and not able to pay their premium, temporary, for one to three years, for example. Yes, you do not need to pay premium when your policy contains APL option as long as your cash value higher than the total amount of APL. I was the victim of APL when I was only six years-old (read more about this a http://xaivierchia.blogspot.com/2011/11/insurance-be-aware-of-automatic-premium.html). Therefore, I really hope most people can get rid of abusing APL, that is, purposedly use APL. The consequence of abusing APL is you need to pay high interest loan (normally it is higher then BLR), which will ultimately dilute all your saving fund.

Dialog 3
Agent: When the time of maturity, the insurance company will give another 100% return.
People: It sounds great. Is this return also guaranteed?
Agent: Yes, the 100% return is guaranteed and payable when the maturity date is reached.
People: It is too good to be true.

Comments 3:
First, this 100% return is based on the sum insured, instead of the total money you paid, as you probably know after reading the first Dialog.
Second, can you find any statement of the policy mention about what is the amount of your principal money?

Based on my previous experience when I help my another friend to read his short saving plan from Maybank, the return is 3.15% (first year & second), then 103.15% for the last year (maturity date). The 103.15% is actually the Principal (100%) plus the interest return (3.15%). Therefore, what I deduce is that the people will never get back the total sum of money they have paid for the saving plan, but only the 100% of the sum insured.

Last but not least, I would like to highlight that insurance is good for protection and off-set those potential risk in our life. Therefore, if you really think about to make money from your money, that is, investment, do consider proper investment tools. So far, I did not see anyone have a good retire fund just because he or she had bought lots of insurance saving plan before. But I do see when unfortunate happens suddenly, insurance does help people a lot in terms of temporary financial assistance.

Again, there is not free-lunch in this world and nobody can be rich (or financial free) simply by buying lots of easy available, well-known and highly promoted, so-called "investment products". If you want to learn how to fish, then you should buy fishing kits instead of fish. That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia


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