Insurance Returns are LOW

Common Belief:

Insurance Companies like to quote us high NON-GUARANTEED returns on their quotations and entices us to buy their plans... But in actual fact, the returns are very LOW...

First of all, Insurance Products are normally used as a Protection Tool.

In case you are planning to get yourself an endowment savings plan, then you must be very clear of the rationale of doing this. The main reason we would want an endowment savings plan is because of the certainty, capital protected nature, for retirement savings purposes, and finally, in the event that we are critically ill, insurance companies will continue to save on behalf of us.

If you are going after higher returns, then you should look at Unit Trust Funds, or Investment-linked Insurance Plan.

Hey, but my Unit Trust Consultant told me that PROTECTIONS and INVESTMENTS should not mixed together. So, should I just leave investment-linked plans behind if I solely want to invest?

For your kind information, PRUDENTIAL ASSURANCE (M) BERHAD are able to offer affordable insurance plans for the Malaysian market made possible by the introduction of Investment-linked plans in 1997. Premiums paid under Investment-linked plans are not burned. A pool of cash value was created through the investments for our insurance plans without us even noticing it. For those who have their Investment-linked Insurance Plans purchased in the 90s, their cash value would have ballooned and they are laughing all the way to the bank without understanding why. That is only for a mere span of roughly 10 years plus. They asked me, how come got so much even though they have made several hospitalization claims in the past 10 years.

My own plan was bought in Year 2000 April, monthly premium RM150, total cash value up to date is already more than 5 figures. Wow, it is as if, I get almost 70% of my premiums back. I was covered by PRUDENTIAL for nothing? I love you, PRUDENTIAL.

Now, of course we need to understand how the whole things work, and whether this stellar performance of the Investments is sustainable. In short, everyone would like to know how it works, and whether it will work for those of you who plan to join now. Will it be too late and missed the boat already?

First of all, for all Investment-linked Plans, the premiums paid by us are converted to UNITS. It operates similarly to Unit Trusts Fund (a.k.a. Mutual Funds), where it charges a one time sales charges of 5%-6%, and yearly management fees of 0.8%-1.5% regardless of whether the fund make or loss money. But, the returns for Investment-linked Funds are much more consistent and stable than Unit Trust Funds.

REASON?

Simple, let’s say, in the year 2005, you decided to invest into a Unit Trust Fund of your choice (FUND A). Then your Unit Trust Consultant will most probably advise you to invest monthly, instead of lump sum investment. He would have told you everything about the power of Dollar-Cost Averaging (DCA), which is rephrased to RCA (Ringgit-Cost Averaging) in Malaysia. Your investment value is closely related to how much units you have accumulates at the end of the day, as all money invested are converted to units, by referring to the unit price on the day that you invest. [To those of you who are not so well-verse with the term RCA, it simply means that since the market fluctuates monthly, it is better to invest monthly to take advantage of the low price in exchange for more units.]

So, heeding his advice, you decided to invest RM200 monthly into the fund. But so happen that there is a newly launch fund which offer free units, and lower sales charges of less than 5%, you decided to invest in the new fund (FUND B) instead. Then in the year 2007, market have reach its peak, will you withdraw your cash from the fund to take profits? Maybe yes, maybe no for some. Doesn’t matter. Will you continue to invest at the peak? Probably not. Suddenly, in the year 2008, market crash, will you still continue to invest the RM200 monthly? For majority, people will freak out and stop investing in 2008 although that is the best time to invest as the unit price have gone down and it is very very cheap. But most stop investing more money. What is making things worst, is when a lot of people not only stop plugging more money into the fund, they withdraw it. Let’s assume that the Fund Manager for FUND B is a fundamental long-term investor, and he had invested heavily to take advantage of the cheap market. But can he invest more when many of its Unit Holders are withdrawing? He might even be force to sell the shares at loss just to meet the withdrawing requirements of the Unit Trust Fund. Even if you have decided to continue invest the RM200 throughout the market low, you might face the uncertainty of losing more money because your Fund Manager are forced to sell at loss.

NOW, how is Investment-linked Fund different?

Everyone who bought an Investment-linked policy from PRUDENTIAL, will only have 3 non-shariah funds and 3 shariah-compliance funds to choose.

The funds are:

PRUlink Equity

PRUlink Managed

PRUlink Bond

PRUlink Dana Unggul

PRUlink Dana Urus

PRUlink Dana Aman

In fact, for PRUlink Managed, 70% are invested in PRUlink Equity and 30% goes back to PRUlink Bond. Same case for PRUlink Dana Urus which invest 70% back to PRUlink Dana Unggul and 30% into PRUlink Dana Aman. So, there are actually only 4 funds altogether, right?

When do we normally withdraw from our Investment-linked Insurance Plans?

We normally only withdraw our plans, either when we die, totally and permanently disabled, and when we are diagnosis with critical illnesses. Regardless of market directions, you still pay the premiums for your Insurance Plans, right? Will you cancel your Medical Insurance because the market has reached new height?

These are why Investment-linked funds are much more stable than Unit Trust funds in general. The demands are always consistent and keep growing because every now and then, people are buying PRUDENTIAL insurance and they are indirectly participating in above 4 funds. What about the supply then? Supply is already fixed and will only increase if there are demands. So, in short, with increasing steady demands, the units prices of the funds are definitely have only one direction, which is UP NORTH.

Are you sure that Life Insurance gives HIGH returns?

People always say that:

Insurance Companies like to quote us high NON-GUARANTEED returns on their quotations and entices us to buy their plans... But in actual fact, the returns are very LOW...

Well, you do not need to believe me. Go pick up a copy of July 2011 issued of PERSONAL MONEY magazine and look under the column of PRUDENTIAL PRUlink Equity Fund, you will be shock to find out that the 5 years average returns per annum is 12.57%. Now, who is misleading you with the statement that Life Insurance gives low returns?

Is 12.57% per annum for 5 years average consider as high?

Did I just explain that why the returns of Investment-linked are so stable and so…. HIGH?

Since PRUlink Equity launched in 1997 at unit price of RM1, it has never dip below that value even in the year 2008 when global market crash. I have no shares in company that sell or distribute PERSONAL MONEY, so for those of you who want to save a buck, you may view it for free at MPH, or borrow it from friends who bought the magazine, or alternatively, you may refer to www.bloomberg.com/apps/quote?ticker=PRLEQTY:MK for the latest price. Today it is hovering at the range of RM3.30 a unit.

Of course, past performance of the funds is not a guide to the future or likely performance of the funds, and it all depends on the investing experiences of the Fund Manager, and the market conditions.

Want to know how you may participate in this HIGH returns plan, contact me at 012-5601227 or email me at marvyncjj@gmail.com.