I think I had you with the headline. Your love for guaranteed income, yearly increase, income, etc. etc. Unfortunately, the product that we are discussing today, hopes to exploit the same.
Let’s dive straight in. Here’s the investment proposal I have received.
The KK Assured & Guaranteed Income Plan
Take a 30 year policy with a premium payment term of only 15 years.
Basically, pay Rs. 50,000 every year for the next 15 years. Assuming I am 40 today, I pay upto age 55.
Receive a guaranteed income starting at Rs. 65,000 from the 16th year to 30th year with a yearly increase of 5% to 7%.
Of course, there is a 5 lakh life cover also thrown in. In case I depart this planet early, my dependents will receive a death benefit that is at least this cover.
Here’s what the illustration looks like.
So, I invest total of Rs. 7.5 lakhs over 15 years and I get a guaranteed Rs. 15.87 lakhs over the next 15 years. That is more than double of what I invest.
Looks quite attractive. Isn’t it?
I want to give it more time before I sign the dotted line. I hope I am not missing something here.
Can you help me assess this investment? Is it worth it?
The above link has the illustration table in an excel sheet. Download.
Do share your observations as also how did you go about doing the evaluation.
I dont know what is the factor(5-7%) that you have used for the payouts from year 16 to 30.
Anyways i used a uniform 7% increase YoY on the payout from 16th year to 30th.
16th year payout – 65000
30th year payout + maturity benefit: 302605
Now this cashflow has a IRR of ~5%.
Considering current rates of risk-free return and assuming that that holds, an 5% IRR is pretty useless given that this doesn’t even factor inflation.
Ah! So the low return is the cost of guarantee?
PS: All numbers are mentioned in the attached excel sheet in the post.
I think you should consider time value of money. Numbers can’t be compared directly at a different time period. Total outflow also includes GST, so it should also be consider.
Thanks! Taking all into account, what do you say is the expected return from this proposal?
Hello Vipin,
its not worth it.
its just 4.25 CAGR
11/15/2019 50,000
11/14/2020 50,000
11/14/2021 50,000
11/14/2022 50,000
11/14/2023 50,000
11/13/2024 50,000
11/13/2025 50,000
11/13/2026 50,000
11/13/2027 50,000
11/12/2028 50,000
11/12/2029 50,000
11/12/2030 50,000
11/12/2031 50,000
11/11/2032 50,000
11/11/2033 50,000
11/11/2034 -65,000
11/11/2035 -69,550
11/10/2036 -74,100
11/10/2037 -78,650
11/10/2038 -83,200
11/10/2039 -87,750
11/9/2040 -92,300
11/9/2041 -96,850
11/9/2042 -101,400
11/9/2043 -105,950
11/8/2044 -110,500
11/8/2045 -115,050
11/8/2046 -119,600
11/8/2047 -124,150
11/7/2048 -128,700
4.25%