Sunday, 17 November 2013

OCBC - MaxEdu Choice Plan (Finding out the % Return)

Most recently, I realized that there's a growing trend of Malaysian who are planning or have already invested into an insurance savings plan / child education savings plan. Such a plan also commonly known as annuities scheme requires the participant to pay a certain amount of cash for a fixed period of time. After which that participant will receive periodic payments over an extended period of time, followed by a lump sum payment return upon maturity of the plan.   

In this post, I will be looking at a child education savings plan by OCBC Bank called MaxEdu Choice. 

Key Characteristics of MaxEdu Choice
1. Pay only 5 years of Premium
2. Receive or accumulate cash payouts in the policy year when your child turns 17.
3. Policy matures in the policy year when your child turns 21
4. Includes insurance cover for death, terminal illness, or total and permanent disability for your child

How does MaxEdu Choice work?
Sample scenario as provided by this plan:

OCBC MaxEdu Choice - Click to Enlarge
How much Mr. Tan has to pay for this plan?
Premium : RM6,712.20 per year (RM559.35 per month)
Total years of premium payment : 5 years
Total premium paid after 5 years : RM33,561

What will Mr. Tan will obtain in return:
  • Insurance cover of RM30,000 for death, total and permanent disability (TPD) and terminal illness coverage for his son, Brandon till the age of 21. (please correct me if I am wrong)
  • Two payouts when Brandon turns 17 and 18. Amount paid is equivalent to 5% of the sum insured. That would be RM1,500 per year.
  • Another two payouts when Brandon turns 19 and 20. Amount paid is equivalent to 30% of the sum insured. That would be RM9,000 per year.
  • When Brandon turns 21, the policy matures and Mr. Tan will receive a guaranteed amount equivalent to 30% of the sum assured (RM9,000) and a non-guaranteed amount of RM18,016. This would total up to RM27,016 received by Mr. Tan upon maturity.
The diagram below illustrates how the payout of the policy looks like:

Click to Enlarge
What is the percentage (%) annual returns of MaxEdu plan?
The returns of this plan is not a straightforward calculation due to the following reasons:
  1. When Mr. Tan contributed a total of RM33,561 over 5 years, there was no annual interest earned.
  2. From the 6th to the 10th year of this plan (another 5 years), the RM33,561 placed by Mr. Tan also earned zero annual interest.
  3. Only from the 11th year onwards will Mr. Tan earn 5% of the sum assured (2 years), 30% of the assured (another 2 years) and finally receive a lump sum cash payment upon maturity. 
Therefore to determine the percentage (%) annual returns of this plan, we have to calculate the returns using the Internal Rate of Return (IRR) formula.

Internal Rate of Return based on MaxEdu Guaranteed Returns only:
Amount Invested : RM33,561
Guaranteed Returns : (RM1500 x 2) + (RM9000 x 2) + RM9000 = RM30,000
Internal Rate of Return : 

Internal Rate of Return based on MaxEdu Guaranteed + Non Guaranteed Returns:
Amont Invested : RM33,561
Total Returns : (RM1500 x 2) + (RM9000 x 2) + RM27,016 = RM48,016
Internal Rate of Return :

Through identifying the IRR of this plan, you can now determine the worthiness of investing in this plan. 
Is there a need to have insurance protection for your kid? Perhaps saving up and getting the best returns for you child education fund is the main priority?  Could there be better investment plans around? 

Cheers and Happy Planning!

P.s : I just realized that OCBC MaxEdu plan is only available at Singapore! Never the less, by finding out what's on offer from our closest neighbor, I realize that the insurance savings plan offered in Malaysia is so much better then Singapore in terms of IRR.  .

Related Post:

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1 comment:

  1. Thank you for sharing such great information. It is informative, can you help me in finding out more detail on Child Investment Plans, i am interested and would like to know more about this field and wanted to understand the basics of Child Plans