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# Enhancing Returns From Your Endowment Plan

Today, I will be sharing a case study of how I restructured my own endowment plan recently. You might want to do a similar review of your own plan and see how you can improve it.

My case study is based on a 20-year endowment plan (sum assured \$20k) that I bought many years ago. For this plan, I had to pay \$155.20/month for a period of 20 years and it will provide me with a coupon payout of \$2000 every two years. These coupons could be reinvested with the insurer to earn attractive interest rates. There will also be a bonus that will be paid out upon the maturity of the plan.

At the point of purchase, the benefits illustration showed that I could expect to receive about \$52902 upon maturity of the plan. This was based on the par fund achieving an investment returns of 6+%p.a. (estimated) and a 5.25%p.a. interest given on coupons reinvested with the insurer.

Based on my monthly premiums of \$155.20, this gives an internal rate of return (IRR) of about 3.37%. If I had made my premiums annually (\$1822.20) instead of monthly, the IRR would have been higher at 3.43%.

The plan also came with a couple of riders – critical illness (CI) protection and total and permanent disability (TPD). If I had done away with those, the annual premiums would have been lower at \$1731. Based on this amount of premiums, the IRR will be even higher at 3.88%.

I then went on to calculate the IRR using the most recent projections given by the insurer. Obviously, it is lower. We are given projections from 3.7% to 5.7% for the par fund with the interest rate of the reinvested coupons ranging from 2.25% to 4.25%.

All the IRR results are shown in yellow in the table below. For my mode of payment (monthly with riders), my expected IRR would range from 1.58% to 2.85%.

The “Maturity Payout” in the last row shows the amount of money I would expect to receive (at different projection of par fund returns) if I reinvest all my coupons.

The last column is the original projection based on a par fund returns of 6+%.

To be honest, at the time I bought the policy, I know nothing much about investments. The plan was more for savings and the absolute numbers looked good then. Looking at the IRR now, they look a bit on the low side.

These are the things I went on to implement with the rationale given:

1. Change the monthly premiums to annual premiums. I save 2.2% every year and this beats the returns I’m getting from the banks.
2. Remove all the riders. The reason why I can do so is because I have other insurance plans that already provide sufficient cover for critical illnesses and TPD. It makes no sense to pay 5% more premiums per year for something I don’t really need (20k cover for CI and TPD). Furthermore, the purpose of this plan is primary for savings and not for insurance. Paying 5% more for an instrument that gives an IRR of 2-3% is a big deal.
3. Withdraw all my coupons that had been reinvested with the insurer. The current interest rate for the coupons is 3.25% p.a. and I am confident of beating this benchmark if I reinvest the money myself.

There you have it.

One thing I realised is that the circumstances of people change throughout the years. What is applicable in the past might not be applicable today.

Therefore, it might be worthwhile for you to go through and do a similar review of your current investment and insurance portfolio from time to time.

Being proactive about such matters can very well determine whether you achieve your own retirement goals as planned.

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desunet says 9 years ago

Hi ,

Can i ask if the coupon payout you received is reinvested at a compounded interested rate? Any of such possibility? I think you did a good choice to reinvest the \$2k for yourself.

Thank you