To calculate the ROI (Return on Investment) of your investment is pretty simple. Let’s say we buy a house at RM100,000. We sold it after 2 years for RM120,000. The total ROI in 2 year is RM20k/RM100k = 20%. The effective annual rate (EAR) is 9.54% per annum.

Below I am going to show you how we can determine the ROI if you buy an insurance policy. Mark bought an insurance policy from Great Eastern Life Assurance. The policy he bought is a whole life policy named Supreme Care which will mature at age 99. Mark now is 30 years old. The premium he pay is RM1059.40/year for the sum assured of RM100,000.

Scenario 1: Surrender after 5 years
After paying the policy for 5 years, he heard from his friend that he shouldn’t save money in an insurance policy. It is a waste of money. So he surrendered the policy. The surrender value is RM3900. Mark’s friend is right about “losing money” in insurance. Mark had paid RM5297 and got back only RM3900 in return.
ROI = -26.37% in 5 years.
EAR = -10.04% per annum.

Conclusion: This policy is a bad investment according to those who prefer to lapse policy.

Scenario 2: Mark diagnosed cancer after 10 years.
He doesn’t need to pay the premium anymore because of a waiver premium rider attached to the policy. He recovered after 2 years of treatment and enjoy the benefit of the policy until he surrendered the policy at age 55 at retirement. The surrender value he is entitled to is RM30,000. The total premium paid is RM10,594.
ROI = 652% in 25 years
EAR = 5.16% per annum.

Conclusion: This policy provide adequate return and “replace” loss saving when suffering from major illnesses.

Scenario 3: Mark died at 3rd year due to heart attack.
His family is entitled to claim his death benefit of RM100,000. The total premium he had paid is RM3178.20.
ROI = 3000.46% (yes! 30 times!)
EAR = 317.52% per annum (yes! triple every year!)

Conclusion: This policy is the best investment ever made by Mark, according to Mark’s family.

Scenario 4: Nothing bad ever happen in Mark’s life.
He continue paying the premium up to age 65. Thinking of not needing the insurance protection anymore, he surrender the policy to enjoy the cash value. Total premium paid is RM37,079. Total guaranteed surrender value is RM46,600.
ROI = 26% over 35 years
EAR = 1.23% per annum.

Photo credit: Ho Boon Kit

Conclusion: The cost of the insurance policy is only the lost of potential interest the premium can generate. If Mark put the money in an FD instead which gives 3.7% a year, the cost of the premium is 3.70-1.23% = 2.47% only.

Anyway, do bear in mind the potential of “compound interest”!

KCLau

Personal finance author and trainer

### 6 replies to "ROI of insurance"

• KCLau

@ Jeff,

You will need a financial calculator to get the EAR.
There are some online calculator of Time Value of Money (TVM) that are able to calculate the EAR too.

Here is an article about calculating EAR:
https://kclau.com/wealth-management/tvm-compute-effective-annual-rate/

• Jeff

Hi KC,

How do we find the state annual interest rate for the example above in order to calculate and get EAR?

• KCLau

ROI is the total return of investment. In this case, in the period of 2 years, the total return is 20%.

EAR is different – it is the effective annual return. This is the real return calculated every year.

Example – you put RM1000 in FD for 4% a year. After 2 years, you get RM1081.60.
The ROI is 8.16%. But the EAR is 4%.

• Alvin

Hi, how 2 calculate the EAR?
Why ROI is 20%, EAR is 9.54%?

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