5% Guaranteed Return?
Recently, a friend of mine received a call from a agent promoting a plan with 5% guaranteed return every year. Wow, who wouldn’t be interested in such a plan in such investment climate? But wait, what type of guaranteed return are we looking at?
The 5% guaranteed return is most likely a form of Return OF Capital, not a Return ON Capital or commnly known as the ‘rate of return’. Return OF Capital is giving you back what you have put in. Return ON Capital is the gain based on what you put in. For example, let’s say you have placed $100 into a saving account. On the 2nd year, you took out $5, you are left with $95 in the savings account (excluding interest). This $5 is the Return OF Capital. Lets say the interest rate is 2%. The $2 interest you earn is the Return ON Capital.
The plan being promoted is most likely be an anticipated endowment plan whereby the plan will guaranteed you a redrawal of a certain percentage of the the sum assured every 1 or 2 years if you want to. This is a form of Return OF Capital. The withdrawal is not without its shortcomings as the total return will be affected.
I am not putting down anticiapted endowment, it has its uses. I am just disturbed by how it is being promoted by this agent. Is the agent mis-selling? I would think so. To the average person, a guaranteed return would mean a Return ON Capital, not OF Capital. It is really sad why fellow advisers have to resort to such antics to attract business.
Before you rush out to sign up for a plan, seminar or to invest, remember the saying: If it sounds too good to be true, it probably is.