Hi! all

 Let me share an experiance with all of you. Few days back one of my old friend met me he seemed to be excited. I asked the reason, he told me that he has just taken a new INSURANCE POLICY and now had 25 lakh of insurance cover aggragating all his policies.

He also told me that his insurance agent gave him the best policy. In which he has to give an annual premium of just Rs. 4530 for 20years and would be getting 2 lakhs as maturity amount after 25 years. Also addtional coverage of accident.

  SO just be investing Rs.90600 he would be getting Rs. 2lakhs. Interest ( to be more precise bonus) of around   Rs.109400. GREAT RETURN !!!!!!

With a slight thought I told him that It was the rubbish thing he had got. It would fetch him a very low return, less than a Bank FD.

He was surprised and asked me how. So let me explain you the workings

The required return I would be looking that would  cover the inflationary impact as well as the minimum required return.

Govt. Bond Yield( Risk Free)   7% ( Approx)

Current Inflation                    4.5% ( Approx)

so I would be looking At 11% (approx) return atleast

 to have a profitable investment.

Getting back to classroom and applying Present Value Concept.

Outflow for 20 year 4530*7.963 ( PVAF @11% for 20yrs) are translated into Rs.36072

and my inflow after 25 years will have a present value of Rs.

2,00,000*0.074=Rs.14800

So resulting in a loss of Rs.21272 in real terms( and in fact this is important rather than Money cash flows because of inflation)

I digged into the case more and tried to calculate the return that it would provide me.

With some interpolation I came at a fig of 5.64% p.a.

Don’t pop up your eyes!!! YES it is far less than a Bank Fixed Deposit.

Now smart mind would surely ask me that Insurance Policy gets me a LIFE COVER in case of any contingency whereas a Bank Deposit doesn’t.

TRUE, I agree. But only in case you DIE or meet with some mishappening.

So your chances of being profitable come up to surface when you DIE.

Most of the insurance policies will result in such depreciation in value if Time factor is taken into account. I am not saying All.

So being a Finance person you would be looking to these factors too. Otherwise R U Ready To Die??

 Any suggestion and Ideas are most welcome.

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