one evening while I’m doing my favourite sport (freeletics) someone call me to ask for my opinion about a scenario.
but why this iPhone 6 is here? read until the end and you can buy lots and lots of this.
here is the scenario.
age 25, Engineer non-smoking with annual income of RM78K. This Client have good knowledge in investment especially unit trust. Invested RM10,000 lump-sump in UT at the age of 19 and never touch the money. Client is the only son in the family and have 1 depended which is his non-working mom. Few days ago he was approach by a financial consultant somewhere around KK i guess? and the consultant suggested him to take RM400K of additional critical illness coverage.
the reason is very simple. The RM400K will replace the client income for at least 5 years should he diagnose with critical illness and unable to generate income. He don’t want to burden his mom ( i love this kind of client-responsible).
Here’s the math. RM400K / 78K = 5.12 years.
Now his 2nd concern.
He currently work as freelance in a local company. He can foresee another 3 years of contract with the same company. After the contract he is afraid wether the company will renew his contract. worst come to worst he will have to find a job with a lower pay. if this happen he will have to cut on expenses. insurance will be the last thing in mind.
Client wish to withdraw a sum of money on year 10 for investment purpose without effecting the insurance coverage.
here the story goes. Today he meet an insurance agent. The agent propose him with Option 1.
The client have RM1200++ for the agent to work out a plan for him. Please refer to option 1 in the table below.
The agent said by taking this plan he will need to pay around RM1200++/month for 10 years. by year 10, client can withdraw RM77k for investment purpose.
This is what i think.
There are 2 shortfall from option 1
1) The monthly premium is a bit high. since client job is not secure for the next 10 years if will be a burden for him to pay for such premium.
2) There is an opportunity cost for him for the first 10 years. since most of the money are tied up to pay for the policy. 10 years is very long. one can turn RM500/month into RM96K at compounded rate of 9%p.a since client have better investment knowledge earning 9% p.a is not a problem. and most good funds out there can perform better then 9%.
btw i did 8% in less then a month. opps. 🙂
-most insurance calculation for the policy cash value for the first 20 is 9% p.a
This is my suggestion. Option 2.
1) try to take the longer payment term. – you will pay lesser in premium.
2) Client can use the balance of the non insurance money to start invest early (since he well equip with investment knowledge)
3) He can stop paying the insurance at year 10. from year 11 to year 30 he can use the dividend from his portfolio to fund for the annual premium.
4) in the end option 2 will have the highest return ( in term of realise capital) while giving the same protection over the years.
5) Opportunity cost – A staggering RM300K. If client can get 10% return he will have an extra of RM592,483.20. Thats a lot when your money work a little hard for you. Maybe you can buy 189 pieces of iPhone 6 plus with that much money.
hope you find this article useful in planning your finance. Please feel free to subscribe to my mailing list.