Guaranteed Additions [To the Life Insurance Company's Kitty]!

by Vinaya HS on November 2, 2012

in Finance

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So, I came across this life insurance plan that provides the twin benefit of comprehensive protection and guaranteed additions [on the cumulative premium] of up to 10%. I was really intrigued. On the face of it, a 10% guaranteed addition each year on the cumulative premium is something that you just can’t scoff at and ignore — it’s as good as earning a 10% rate of return on your money. But when it’s a life insurance company extending such an offer, there has to be some magic in the math.

And indeed there is!

Take a look at the below illustrations for an idea of the kind of money the life insurance company would make off you. Even if the life insurance company’s rate of return on your money was exactly 10%, they’d still be walking away with a sizable stash while you’d be left with some chump change.

Analysis at 10% rate of return –

(Click on the image for a larger version.)

Image of analysis at 10% rate of return

Analysis at 15% rate of return –

(Click on the image for a larger version.)

And with some good investment strategies, if the life insurance company’s rate of return on your money was 15%, they’d run all the way to the Bank with huge gobs of money while you’d be left wondering what happened in those 20 years.

Image of analysis at 15% rate of return

But then again, you don’t get to see this part of the calculation in the Sales Brochure do you?




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{ 6 comments… read them below or add one }

Dhirendra November 15, 2012 at 5:37 PM

This shows the magic of compounding. Simply by keeping the compounding effects with itself, the company earns more than the investor. Same is true for majority of companies including Mutual Funds. No one manages to see the real books except their CAs who are all in cahoots. By analyzing the purchase and sale of scrips by these AMCs one can easily surmise that these companies make several times more than the standard 10 to 15% returns which are shown. Real cheese lies somewhere else and gets eaten by the smarties at the cost of poor investors who don’t even get to beat the inflation.

Anoop November 19, 2012 at 11:30 PM

This insurance scam is nothing compared to the Insurance scams of companies in USA.. The way system works in US blows me out completely, a lot of dead investments are forced on the consumer ex : renters insurance, rental auto liability insurance blah blah blah… After reading insurance policies in America, I feel that i should start an insurance company in India and play on the people’s paranoia & make a huge profit :) :)

Vinaya HS November 28, 2012 at 7:47 PM

@Anoop –

Why would you ever want to do that to your own people? Beats me!

Anoop November 29, 2012 at 12:06 AM

One way of getting rich buddy :):)….. I am convinced that none can earn themselves to richness without including magic of math to cheat people.. lol

Vinaya H S November 29, 2012 at 1:12 AM

@Anoop –

I guess a much better bet would be to employ the magic of math on your investments to get rich. :-)

And, when would you conclude that you’re rich enough? :-)

Anoop November 29, 2012 at 1:18 AM

When I have enough money to lead rest of my life without any earnings, yet lead a lavish lifestyle, that’s when I can call myself rich enough.. :)

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