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Investing In Insurance

>> Tuesday, December 29, 2009

It is already my 100 post!

I recently met a client who wanted to take up insurance for his parents. I casually asked why the sudden interest to insure them? He explained that he has a friend whose mother had recently passed away and he can now retire because the insurance pay out was quite significant. Needless to say, the reason my client was interested to insure his parents was because he too wanted to retire on the insurance pay out as well when his parents move on.

Saving the emotional and ethical comments for later, I decided to look at this from a practical angle if it was indeed worth while by analyzing the rate of return for such an "investment".

So I generated a table of average level premiums payable for an average male/female, non smoker for a term insurance coverage of $250,000 on death only (No TPD or CI riders) till age 99. (For those of you who do not know, although most term coverage is till age 65, there are insurers covering till age 99, and under this policy even if you did manage to live till age 99, they will pay out the coverage at your 100th birthday. The catch is the premiums are significantly higher of course.)




For those who are familiar with time value of money calculations, the working are FV=$250,000; PV=$0; N=number of years (i.e. Till Age - Age policy taken up); PMT=Premium per annum; 1/Y=the values of the table (i.e. the compounded returns).

Due to the longer life expectancy of  females, the premiums are significantly lower. (Hint: So if you had to make a choice, basically you know who is more worth while to carry out this plan with.)

For those who wish to carry out this "investment":
  • If the plan was taken up at age 50, you will receive a guaranteed return even if the insured lives forever (i.e. age 100).
  • Based on the average life expectancy, 75-80 for males and 80-85 for females, you will still be guaranteed a return of about 4%, regardless of the age the policy is taken up.
  • You can potentially get the lump sum earlier at a much higher rate of return.
  • A major drawback is you cannot withdraw the amount you invested for emergency use at any point in time, and if you were to stop contributing to this plan, you lose all your earlier contributions.
I believe not many has viewed insurance in this perspective so do share your thoughts of this "investment".

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