Question

To help plan for their retirement, Mary has recently purchased a 20-year endowment insurance with a yearly premium of $4,000 and a projected maturity value of $170,000. She has also invested $10,000 into a managed fund with a projected return of 8% per year.
(a) Estimate the projected future value of the managed fund in 20 years’ time and compute the projected annualised returns of the endowment insurance.

(b) Mary was also introduced to an annuity product. Discuss the main features of an annuity, an endowment insurance, managed fund and how they could help in the retirement planning of Mary

Answer 1

Answer a. The Future Value (FV) of managed fund can be found by the formula

Where PV is the present value = $10,000; r is the projected return = 8% and n is the number of years = 20

Thus putting the values in the formula we will get

On further solving we will get FV = 10000 * 4.661

On solving this we will get FV= $46,609.57

To get the annualized return of endowment insurance you can either use excel or financial calculators

for excel you put the cash flows in the following way

Year+L152LK130:L151	cash flow
1	-4000
2	-4000
3	-4000
4	-4000
5	-4000
6	-4000
7	-4000
8	-4000
9	-4000
10	-4000
11	-4000
12	-4000
13	-4000
14	-4000
15	-4000
16	-4000
17	-4000
18	-4000
19	-4000
20	-4000
21	170000

Then use the IRR function in excel and select the cash flows from the top to the bottom, then press enter

You will get the IRR which represents the annualized return of endowment insurance to be= 6.73%

Answer b. Annuity is when a particular amount of money is provided in equal intervals. This is helpful for those who want a fixed sum of money every year after their retirement. However this cash flow does not happen for ever and after the end of the term no money is provided, which can be a problem if one outlives the predetermined term.

Endowment insurance is a type of insurance which collects a fixed amount of money every year and provides a lumpsum amount during the maturity. This can be programmed in such a way that the policy holders gets the lumpsum on or after the retirement so that the policy holder can then spend or invest the money the way they like.

In Managed funds a lumpsum amount is invested then that amount is used by a fund manager to invest in the stock market. The fund manager can use that fund to invest in any number of stocks of any company which he believes will provide the maximum return with the least amount of risks. This can be used by Mary to invest any lumpsum amount which would help her earn more return than any savings account.

Mary can invest any lumpsum amount she has in Managed fund, the annual savings to invest in the endowment insurance policy planning it in such a way that it matures at her retirement and then get a lumpsum from both the source to invest in a financial security like bonds which would provide an annuity (through coupon) till her estimated life. The endowment insurance can also cover her for her medical needs if any during the time period. There are multiple ways and she can use multiple combinations of these to help her during retirement planning.