If you invest $5,000 yearly for 20 years and earn 5% per annum, you will get $165,000 on maturity.
If you pay an annual premium of $5,000 into an endowment policy, your gain of $65,000 may be reduced by about 50%. You will get a maturity benefit close to $132,000 giving you a net return of 2.7% per annum.
Where does the remaining $33,000 of the gain goes to? The likely component are:
* marketing and other expenses: $20,000
* cost of insurance: $6,500
* profit to the insurance company: $6,500
* total $33,000
Most insurance companies have high expenses, especially in paying commission to the agent. If you choose a company that have lower expenses, you can save $5,000 to $10,000 and get a higher return.
If you buy term insurance (about 5% of the premium) and invest the remaining 95% in a low cost, diversified fund, you can save on a large part of the $26,500. You have to invest in a low cost fund, so that most of the return will go back to you, and not to the fund manager.
Note: The maturity amount is not guaranteed as it depends on the actual return from the investments over the next 20 years.
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