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I was reading this ad for Bajaj Allianz Cash Rich Insurance Plan (in a recent issue of a personal finance magazine) when something about the calculations just didn’t seem right. In fact, they smelt downright fishy in painting a rosy picture of your retirement facilitated through this policy. I wanted to figure out who’s actually becoming cash rich here — You (as you’d obviously expect) or the Insurance Company?
First, how about the ridiculous Rs 10,284 as monthly premium for the next 240-months! Who, even in their worst financial state of mind, would be mad enough to get into such a contract to begin with? I then ran some simple calculations using Excel. As you can see, you turn into a real cash-cow for the Insurance Company a few years into the policy when the corpus accumulated with the Insurance Company exceeds the Sum Assured on the policy. When that happens — and that’s an event that is statistically guaranteed to have the highest probability of occurrence — the Insurance Company already has the cash (generated off the premiums you paid) to pay the Sum Assured. No sweat!
Then, I projected the numbers over the life of the plan. As you can see, the money that the Insurance Company is earning off you is several orders of magnitude higher than what its liabilities (what it owes you in the form of cash backs and one-time pay outs) are. Compounding at its brilliance. But compounding that’s against you!
I wonder who’d buy such a policy! You wouldn’t right?
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