1. #1

    Join Date
    Aug 2011
    Lahore, Pakistan
    Blog Entries

    A discount which looks like discount is not a discount

    I have purchased health insurance from a private insurance company. One day I received a call from the insurance company. The lady on the other side informed me that my health insurance was about to expire and I must renew it. I told her that I would renew it before it expires. The lady promptly informed me that I will get a 10% discount if I renew the policy for two years in the premium payment. I just laughed at this statement.

    What is this discount that companies claim to pay when you avail any service for multiple years. Be it insurance policy, a school fee payment (wherever applicable) or any other payment, you must understand that any discount that seems to be a discount is not actually a discount. Discount is a complete play on time value of money. Time value of money is used by the companies to enhance returns for themselves and then they offer you a paltry discount. This word discount is so catchy that you latch on to it immediately and get fooled.

    So if you have to pay Rs. 20000 for one year and Rs. 38500 for two years, you feel that you have got a discount of Rs. 1500. This is not a discount at all. In fact by paying Rs. 18500 in advance, you have given the company an opportunity to use this money for one year. These days in the market the cost of raising money for a company is around 12%-15%. The discount that you are getting is actually in a way an attempt to use your money.

    So whenever discount is being offered, calculate time value of money benefit for you before making payment.

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