Tan Kin Lian's Blog: Better return from a Low Cost Fund

Thursday, December 13, 2007

Better return from a Low Cost Fund

Dear Mr Tan,

Would like to have your opinion regarding the Life policy. Kindly refer to the attached.

* Main Benefit Illustration - Basic (Non-Par).
* Supplementary Benefit Illustration (Coupon Schedule).

Yearly premium S$1,136
Sum Assured S$25,000
Policy started on 1st Dec 2002

According to my agent, the cash value is fixed! The return will not be affected by the market performance. I have already received the first payment, S$3,750, recently (every 5 years).

REPLY

You pay a yearly premium of $1136

You get $3,750 every 5 years, which is assumed to be re-invested to earn 4% p.a.
After 40 years, you can expect to receive a total of $80,666, comprising of the guaranteed sum of $44895 (inclusive of the coupons) and the interest of $35,791 (assumed to be 4%, non-guaranteed).

This gives you a net yield of 2.7% over 40 years.

If you have set aside 10% of the premium to buy your Term insurance, you would have obtained a much higher sum assured compared to this policy.

If the remaining 90% were to be invested to earn 4% per annum, you would have received a total of $97,100 at the end of 40 year (i.e. 20% higher than $80,666).

It is likely that you can earn more than 4% per annum in a large, well diversified fund. If the return is 5%, the total amount at the end of 40 years is $123,500 (or 53% more than $80,666).

Your Life policy policy gave you a poor return due to the high charges (to pay commission to the agent and profit to the insurance company).

Read this FAQ:

http://www.tankinlian.com/faq/fptips.html
http://www.tankinlian.com/faq/returns.html

5 comments:

Anonymous said...: what if market doesn't perform well? he may lose his money in the investment, isn't that too risky?
After all, the policy he bought has garanteed return.; December 13, 2007 12:16 PM
Anonymous said...: The problem is most people are confused. They don't understand investing. They don't understand and work the math.
They are happy with the refund.In this case why don't they just keep it in a saving account they can see and touch every day, instead of having to wait for 5 years and get miserable refund.
This product is no difference from revosave by NTUC or other companies'.
A little modification here and there to fool the customers that it is new.
Just think. You want insurance coverage? how long? just buy for that term and you get higher coverage for less cost . Invest the rest and get the highest return. If you don't want risk put your money into a money market fund which can give you as high as 3.5%.
Just like what Mr. Tan recommended
you get better return and higher coverage.; December 13, 2007 12:56 PM
Tan Kin Lian said...: Over a period of 40 years, you are likely to get an average return of between 5% to 8%. This averages out the good and bad years. It is based on historical average.

As you are investing for a long period, the risk of a "bad market" is minimised considerably.

If the "bad market" persists for 20 years or longer, it is likely that other asset classes will perform badly. The guarantee on the insurance product cannot be sustained under this environment as well.

Over a long period of time (10 years or more), stocks give a better return compared to bonds and cash. Financial products with high charges will ALWAYS perform the worst.; December 13, 2007 2:23 PM
Tan Kin Lian said...: The policyholder made up his mind to cancel the policy. He will lose $2,000 over the past five years. He expects to gain much more, by taking this decision now to invest in a low cost investment fund.

He was not aware about how much is the difference beween "low cost" and "high cost".; December 13, 2007 2:24 PM
Anonymous said...: A non par product has a fixed rate of return and it is miserable. Whatever reason you buy is not a good reason. There are few variations, like a refund of your premium insurance ,this one has a loss due to inflation.
Why are these refund of premium, cash back,dividend or whatever products created in the first place?
Answer: to bullshit the customers because the marketers or insurers have this belief that all customers are idiots and this is true.If they are not how do you explain so many of these products were sold or bought and they are still selling. The classic example is revosave , a late comer into this lucrative or lunatic market segment and it boasts of huge chunk it has captured.
This is a great conspiracy!!!
I remember a fund manager was sacked for speaking the truth. He said that all investors were stupid in public(alright if you say in private); December 13, 2007 2:37 PM