Pay for 12. Get Double for the Next 12. So, What’s the Catch?

by Vinaya HS on October 22, 2012

in Finance

Thanks for visiting Capital Advisor. I frequently update this blog to cover various topics on personal finance such as investment strategies, financial products that you should buy and ones that you really should stay away from, financial calculators, emerging themes such as early retirement and financial independence, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

That was quite a hiatus from the world of personal finance. A number of you wrote in asking if I was away on work-related travel again — since whenever the blog goes silent it’s usually because I’m traveling. This time though, I was helping D venture into the fascinating world of entrepreneurship. The past couple of weeks have been a roller-coaster ride as we’ve had to significantly evaluate quite a number of things in our life. (Should D leave her job or not? Should we discuss this step with family members or not? Should we even get into all this at all? What if everything fails? How would people around us react? And quite a number of other such, generally pessimistic, thoughts.) I’ll probably compile all of this into a series of articles — I’ve seen a good number of people having similar thoughts and ultimately failing to take even a single step forward. But all of that for a bit later. It’s back to the world of personal finance for now.

So, here’s this headline that recently caught my attention –

A Life Insurance Plan where you pay for 12 years and get double of what you’ve paid every year for the next 12 years, guaranteed.

It’s got to be good right?

But take a look at these charts –

Chart that shows how the life insurance company can afford such claims purely off the interest earned from the premiums that you pay! (Click on the image to see a full-size version.)

Image of a chart showing how much an insurance company can earn off the premiums you pay

Illustration that shows just how profitable you can be for the life insurance company. (Click on the image to see a full-size version.)

Image of a spreadsheet illustration showing how much an insurance company can earn off the premiums you pay

Illustration that shows how, in general, you’re generally very profitable for the life insurance company. (Click on the image to see a full-size version.)

Image of a spreadsheet illustration showing how in general you can be very profitable for an insurance company

After seeing all this, why would you even want to invest in such a plan? Oops! See there you go — we subconsciously used the word “invest” when we’re actually looking at a “life insurance” plan. Stay away whenever you even get a whiff of such a thing.




Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

{ 4 comments… read them below or add one }

Tushar Jain October 22, 2012 at 2:21 PM

Very well explained Vinaya.

I fail to understand why people get enticed towards such endowment plans. Other day, I was talking to a friend who has recently purchased TATA AIG plan(with an annual premium of 60k) where the company will start paying him a guaranteed amount per annum after 5 years(20 k I guess) and would double the sum after 10 years(40k). These payouts would go on till he is 100 years, and in case he dies, the sum assured (of meagre 6 lacs) would be paid to the beneficiary.
I tried to show him how the insurance company is earning on his behalf, and how splitting his bucks between a Term plan, an FD and a Mutual Fund would make him financially better(and secured) in the long run.

Now his response was:-
First -absolute denial. He tried finding faults in the calculations and formuale.
Second- justifying the choice he has made. That he would save tax, his beneficiary would get some money when he dies, he is actually getting something back rather than a sunk cost as in case of term insurance.(if he outlives the term)
Finally- he accepted that it seems he has been carried away by the plan. SO the point of defence was that he doesnt have much time to manage his finances, and the plan will take care of his investment(if we can call it so) and tax saving.

While it was never my intention to belittle him over the wrong decision he has taken, I was concerned to show him how he could improve things for his betterment, given that he has paid just a single premium.

So the final defense was again the last point, that he is not well equipped to manage his money and this plan does it for him.

All said and done, it reminds me of the adage
“A fool and his money are soon parted”

Stable Investor October 22, 2012 at 8:47 PM

Your final point is worth its weight in gold. :-)
Investing & Insurance should not be mixed. Period.

Vinaya HS October 24, 2012 at 7:34 AM

@Tushar Jain –

They’re already parted. :-)

It’s seriously amazing how many people say that they don’t have the time/skills to manage their own money. They have time for everything else in life right? And I personally believe that you don’t need to be a “math wizard” to manage your finances. A few common sense rules are what’s more than enough for most people.

Vinaya HS October 24, 2012 at 7:37 AM

@Stable Investor –

I loved your comment on KFA over at your FB page. :-)

Previous post:

Next post: