Martin Lee @ Sg
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Returns on Endowment Plan

Question from a reader:

Dear Martin,

I am enquiring on behalf of my father who has been approached by an insurance agent in signing up an Endowment Plan.

The amount is $50,000 is single premium for 5 years term. The insured amount is $62,500. The part that I am uncertain is on the Projected at 2.80% and 4.30% on investment return (which both are non-guaranteed) described.

The agent explained that it is based on compound interest 0f 2.997% upon 5 years maturity. She also explained that the non-guaranteed investment return is required by MAS to provided.

Appreciate if you can advise on:-

1. Can I deemed the compound interest as 2.997% as the guaranted interest rate? Cos I have some concerns on the so-called non-guaranted is like too good to be that attractive.

2. Is this endowment plan similar to a fixed deposit? Which one would be a safer option, this or the recent fixed deposit with BEA over 2.125%?

Thank you for your time in reading and hope to hear from you soon!

YearTotal Premiums PaidSurrender Value
GuaranteedProjected at 2.8% paProjected at 4.3% pa
Non GuaranteedTotalNon GuaranteedTotal
1$5000040937906350000906350000
2$5000041250930250552975551005
3$50000415629693512551072252284
4$500004187510196520711192953804
5$5000050000453054530796357963

 

My reply:

First of all, you might want to refer to my earlier post on participating funds.

In this case, the insurer is showing you the projected returns based on the figure of 2.8%pa and 4.3%pa for their par funds.

If their funds managed to achieve a 2.8% p.a. return, you will get back $54530 on maturity. This works out to be an annualised return of 1.75% p.a. On the other hand, if they can achieve 4.3% p.a., then your annualised returns works out to be 2.997% p.a. as correctly pointed out by your agent.

As you probably realised by now, this 2.997% return is not guaranteed. The only guaranteed portion is the return of $50000 on the maturity of the plan. Your actual returns might be higher or lower depending on the performance of the par fund.

Your benefit illustration will show you the track record of the par fund for the last three years as well as their asset allocation.

Insurers also usually practice a concept of “smoothing” to spread out the gains/losses evenly to policy holders. In layman terms, this means keeping some buffer (when they declare bonus) during good years to make up for bad years.

Lastly, an endowment plan is not the same as a fixed deposit. There is always a trade-off between risk and return. With an endowment plan, you stand a decent chance of getting a better return than a fixed deposit but you bear the risk of the par fund underforming. You also bear the liquidity risk (funds locked up for five years). 

Ultimately, it is up to you dad to decide which are the risks he wants to get paid for because ultimately that is what investment is – understanding the risks and being paid for those risks you are willing to take.

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8 comments
Stephen Teng says 10 years ago

1) I refer to yr comment on “guarantee”. How fool-proof is a guarantee, if the said insurer goes bust with the maturity time ? If it happens, what will then happen to one’s fund ?

2) Also, any difference between a guaranteed capital fund investment and a protected capital fund investment ?

Your comment is appreciated. Tks.

Reply
    lioninvestor says 10 years ago

    Hi Stephen,

    the guaranteed component of course depends on the insure not going bust. If they do, the Insurance Act provides for the setting up of a Policy Owner’s Protection Fund (”PPF”) to compensate policy owners. Under the current provisions, the PPF will cover up to 90% of an insurer’s liability on any life policy.

    Rather than relying on the terms capital guaranteed or capital protection (which really is a misnomer), it is best to understand the product thoroughly and know what is the best case and worst case scenario.

    Reply
      Stephen Teng says 10 years ago

      Hi Martin,

      Tks. Is the PPF also applicable to an investment company, the issuer, , going bust, like Lehman Brothers, if the product is a guaranteed/protected capital investment fund/structured product , whose underlying instruments are reliable ?

      Reply
        lioninvestor says 10 years ago

        Hi Stephen,

        It only applies for life policies.

        No specific answer to your 2nd question. Really have to look at it on a case-by-case basis.

        Reply
Lana says 10 years ago

Thanks for the reply

Reply
Controversio says 10 years ago

Excellent reply

Reply
Lana says 10 years ago

Hi Lioninvestor,

Appreciate if you could answer the following questions:

Is it worth taking more than one life insurance?

I understand that insurance companies does not allow policy holders to choose nominees so how does this work in the event the policy holder dies?

Thanks.

Reply
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