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!
| Year | Total Premiums Paid | Surrender Value | ||||
| Guaranteed | Projected at 2.8% pa | Projected at 4.3% pa | ||||
| Non Guaranteed | Total | Non Guaranteed | Total | |||
| 1 | $50000 | 40937 | 9063 | 50000 | 9063 | 50000 |
| 2 | $50000 | 41250 | 9302 | 50552 | 9755 | 51005 |
| 3 | $50000 | 41562 | 9693 | 51255 | 10722 | 52284 |
| 4 | $50000 | 41875 | 10196 | 52071 | 11929 | 53804 |
| 5 | $50000 | 50000 | 4530 | 54530 | 7963 | 57963 |
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.