Wednesday, October 6, 2010

8. A Worthwhile Investment.


The Correct Idea about life insurance is
safety by average : Cost, in the sense of a
guarantee of savings for a future result ; Profit,
because of thrift and compound interest.   - Benjamin David King



How would one define a good investment? Too often, only one criterion is mentioned - rate of return - usually measured in terms of interest. Lately, any investment that gives a 5% return is reviewed favourably because banks savings rates have dropped to less than 1%.

Probably the most meaningful definition of investment should be: ''It pays best when needed the most''.

An investment vehicle may promise a 20% return. But at the very moment of need i.e. required in cash, it may not be very liquid or fetch a comparable price. It behaves like a Fixed Deposit interrupted in mid-term.

Let me quote from an advertisement by an insurer:

''XYZ's bond policy has a proven average annual return of 11.8% over the last 10 years (1999-2008). A one-time investment of $10,000 would have grown to $30,520 over this period. The actual return in each year fluctuated according to the market value of the investment in the Bond Fund and ranges from a high of +38.1% in 2007 to a low of -13.7% in 2001.''

Wait for the punch line: ''The policy also provides life insurance at no additional cost.''

Again, whenever we talk about investment, we are talking big numbers here.
Yet the average life insurance premums is only a few thousand dollars not large enough to warrant the term ''investment''.
Most investment advisors would not ''touch'' (handle) such sums. So, life insurance provides a guaranteed investment.. at the moment when needed most.

No comments:

Post a Comment