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Sunday, January 31, 2010

Investing Investment Funds

By Matthew Wong

Have you ever received calls from financial planners from insurance companies? What do you think about their financial planning service? I believe that there are many professional financial planners who genuinely help people to better utilize their money. However, I believe even more out there are merely salespersons and all they want to achieve is to persuade you into buying their products. Today, I would like to explain more about one of the most popular products that they sell - mutual fund linked insurance products.

The first thing you need to know is the operating structure and the coordination between insurance companies and fund managers. When you pay your monthly installment to the insurance company, the company sends the money to the fund managers. Some of these mutual funds platforms offer multiple funds for you to switch from, from 10 to over 300 funds. You can allocate your payment to several different funds, and buy specific unit of funds. Then if the fund did well increase their prices, your existing units become more valuable and you become better off.

But for me I don't prefer this kind of products due to its high cost. You may not notice that when you look at the brochures or listen to the presentations, because they deliberately play it down. The cost structures are complicated and carefully calculated by actuaries to ensure the gain of the insurance company. The sales man is so good at presenting the numbers; it would sound like the product is a cash generating unit and the cost is so low its negligible. Nothing could be further from truth. In fact, one of the main costs of the product goes to the salesperson. Because the product usually needs fixed annuity payments and the insurance companies have tactics to ensure the continuity of the policy, they are confident to pay out as much as half of all the premiums they receive in the first year.

On your monthly statement may find that the account value is not exactly the amount of money you own. There is another value called the surrender value usually printed in little text. That's the real amount you own which is the amount you get when you stop the account and get back your money. The fee for the insurance company is calculated as a percentage of your account value. Therefore, they would want a higher account value and a lower surrender value. The cost percentage is usually not high apparently. But if you try to do a spreadsheet simulation, you will see how much of the money generated from your capital goes to the insurance company. It may surprise you.

The final main fee you'll be paying with your installments is the management fee for the fund managers. They manage your money, try to give a competitive growth rate and they take a percentage of you capital, hopefully covered by the value increase.

Mutual funds linked insurance products are useful to some kind of people, but definitely not everyone in the society. Before you decide to commit yourself into a policy with 20 years of payments, I recommend you really dive in to understand the cash flow and the cost involved. - 23212

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