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Endowments and Saving Plans

Had i not have the early financial education that i had now, I would most probably bought some of these from my adviser friends or the pretty advisers at bus interchanges.

The problem is that it might not be the form of  "Protection" that they are touted to be. I have a colleague who asked me if this is a good plan.

Might as well take this opportunity to come up with a checklist to evaluate endowments for a person.

1. Evaluating your needs

What are your insurance objectives

Chances are if you are evaluating an endowment, you should have at least 1 adviser, if not more than one that have done some form of needs analysis with you. They might evaluate that you need some of the following (if not all, if the bloody ass scares you with all the doom case scenario) :

  1. Life Insurance (Term, Whole life or Limited Whole Life)
  2. ILPs
  3. Disability Income
  4. Personal Accident
  5. Hospital & Surgical
  6. Other General Insurance

In my previous article on my insurance philosophy, I have written extensively on some of these. Do take a look to get a better vantage.

Knowing clearly your plan is important so that you can evaluate and decide clearly. If you don’t you might be stabbing in the dark and that certainly isn’t a very nice way of evaluating something that will eventually set you back tens and thousands of dollars.

 What you have already been covered

Endowments are essentially savings, but it is recommended that you take care of hedging the majority of your immediate needs before proceeding to endowment. Not spending any effort hedging for your dependents and against large hospital bills can be very detrimental. Your savings that you bought now will not save your dependents or yourself in some of these scenarios.

My advice is to choose the most cost effective plan to cover after evaluating the cost and benefits.

In most cases endowments might not be the most immediate needs. If you believe you have all these planned out, then we can move on.

 What are you looking for in this plan?

Take some time to write down what the adviser said about why you need this plan. Or for the matter, why did you approach the adviser in the first place.

If it is for protection, then i am afraid this plan might not cover your needs. True, it might have protection against death and TPD, you will still need critical illness coverage. A life insurance might be more suitable for you then an endowment.

If it is for savings and protection, I still think a limited whole life or whole life is a better option when you compare the rate of return. (Note: I prefer term insurance and savings on my own)

If its purely for investments and savings then we can proceed to the next section.

2. Evaluating the need for an Endowment

Do you understand the objective of an Endowment?

Endowments are designed to pay out the death benefit when the insured dies during the term of the policy or survives at the end of the policy term.

It combines insurance protection with a savings plan for the policy-owner.

Endowment Policies usually have a fixed maturity date. Typical maturities are ten, fifteen, twenty years up to a certain age limit.

Endowments are not limited to local endowments but overseas tradable endowments like UK TEP Endowments that provide higher projected returns.

In Singapore, the line can be blurred between endowments and whole life policy. This is due to riders being attached to endowments to cover for whole life benefits such as CI or personal accident.

Try to learn to distinguish between them. My advice is to use endowment more as savings and whole life as insurance protection.

That said, whole life does have cash bonus, which acts as a form of forced savings as well, so you might not need endowment at all. However, should you want to force save more than your targeted protection coverage, then you can consider endowments.

Where does this fit into your savings, investment or retirement plan?

After understanding an endowment, you might want to compare to your other forms of savings or investment vehicles.

  • Is it for diversification from your other investment?
  • Is it for your children’s education?
  • Is it for a custom objective 10, 15 yrs down the road?
  • Are you risk adverse, so you decide to use endowments instead of punting stocks?
  • Do you have existing investments or savings?
  • Is this for retirement purpose?
  • How much percentage of this should constitute the overall plan.

These are some of the questions that you should be asking yourself. If you know where to fit this in, then we can proceed.

If not, then i suggest you plan out your retirement, your budget and your objective for your money before you go about evaluating this endowment.

How much can you set aside for the endowment?

Plan for how much you intend to service this endowment with.

Can you service that endowment?

Important question here. Many didn’t plan this out properly or due to some circumstances, they need to terminate their endowment.

 Once they do that, there is a high possibility that the surrender value is less than the amount of premiums paid.

While we cannot plan for ALL circumstances, plan within what you can. Have a budget. Something like what is illustrated here (this is my allocation some time ago. it is an example. don’t take this any other way.)

3. Evaluating the Endowment

Knowing the endowment

 Lets get straight to evaluation. I wouldn’t say my criteria is the most comprehensive, but it covers enough.

The plan we are evaluating is PruCash. Many folks buy this. For good reason because you get to see prudential agents almost everywhere. Is this the best endowment? I can’t say it is. I can’t say it is not.

Personally i can’t compare if i don’t have a plan to compare against. So my friend would need to source out alternatives on his own.

  • 27 year old non-smoker
  • Policy Term :  25 years
  • Monthly Premium : SGD 134.67
  • Yearly Premium: SGD 1619.71
  • Total Premium paid after 25 years: SGD 40492.80
  • Sum Guaranteed Assured: SGD 20,000
  • Yearly Cashback: SGD 1,000
  • Total Guaranteed Cashback: SGD 24,000
  • Crisis Waiver rider at SGD 29.11
  • Death Benefit
  • Accelerated Disability Benefit

25 years? I wonder what i will save for 25 years and end up at 52 years old. What do i buy then? I believe the most plausable thing you will do is if you plan to have children at the age of 32 and by 25 your child wants to go for a university education.

Cash back

After the first year, every year, P will payout SGD1,000, This is Guaranteed.

Personally i do not understand the need to cash back. Do note that in the Benefit Illustration, the surrender value include yearly cashbacks and accumulated interest.

What does this mean? If you take your cashback every year and go buy a LCD TV every year, you won’t get the projected returns of SGD 59,238 at the end!

A large portion of accumulating interest depends on the cash back.

So why the cash back? Beats me. Some readers here may educate me the real purpose of this. I see it more of a facade to create a plan that gives out a lot of money. SGD1,000 is a sustantial amount. Folks are tempted when they see or foresee what they can hold and feel rather than what they have to wait 25 years for.

Note: If the cashback is left to accumulate interest, the interest is 3% per annum. this interest rate is not guaranteed.

Of Death Benefit and Crisis Waiver

The sum assured plus all bonuses to date is payable in one lump sum upon death before maturity provided the Accelerated Disability Benefit has not been claimed.

Folks tend to look at the death benefit as something real good. My take is that while it does play an important role in your hedging needs, you should have life insurance covering this. Moreover, CI is a greater danger for my friend rather than death(touchwood!).

What is Crisis Waiver? Crisis Waiver waives future premiums, up to the premium paying term of the poilcy or up to 85 age next birthday, whichever is earlier, for the basic policy and its supplementary benefits upon diagnosis of any one of the 30 critical illnesses.

Do note that premium for Crisis Waiver is not guaranteed. It may revised upward.

This can be good protection.  If you suffer from critical illness, you would most likely have trouble servicing premium. So it waives your premium, sparing your kin from paying this.

From what i read in the policy, it seems that if you passed away, ur dependents are eligible to claim death benefits, but if you live, I am not sure if it will still be in force. If it is in force, will the death benefit still be there?

Please check this out to get a clearer picture.

Then again, if you save on your own, you will not need to waiver any premiums at all! You just stop paying, so why spend around SGD 800 for this?

Surrender Value

You can only surrender after you pay 3 years of premium. The values for surrender are not guaranteed.

Automatic Premium Loan

This is a form of protection for most whole life, endowment which have a surrender value, so that if you do not pay within the grace period specified, a loan is advanced automatically if it remains unpaid.

This will be enforces as long as surrender value > total loan amount + interest owed to company.

The interest, according to P, is as high as 6%.

This is what i find to be detrimental part of forced saving.

Should you be unable to save, your first option according to the insurer in this case, is to take a loan from them to ensure you can save and they thereby charge an interest that is higher than your project returns for that service.

Does that make any sense to you?

That is why i want you to evaluate whether you can service this endowment comfortably in the first place. Don’t borrow from them.It sounds like my university study loan. At least the rate of return for that one is higher than this.

Projected Returns

When evaluating projected returns, we should go for the most bang for buck. Why? because we do not have a clue what the insurer invests in to get the returns, might as well let the results do the talking.

Is branding important? I don’t think so, considering a repuatable MNC insurer such as AIA is just as likely to cut bonuses while a small insurer such as Asia Life didn’t, we shouldn’t worry too much about this.

According to a rate of investment return of 5.25% for non guaranteed surrender value will reach SGD 35,238. To achieve this, you will have to retain all your cashback opportunity with the insurer. That together with the guaranteed SGD 24,000 from cashback comes up to SGD 59,238.

Looks decent. Punch this figure into my financial calculator:

  • PV : 0
  • PMT: -1619 (yearly premium)
  • FV: 59238
  • P/Yr : 1
  • N: 25 (duration)

We get a projected rate of return of: 3.02%

Wah lao. Macham the rate you get for a 12 yr SGS bonds held till maturity that is super low risk.

On a more serious note, these are non guaranteed rate of return. It depends on the future economic climate. These projected returns would revised down.

Frankly, i’m abit disappointed. I thought these smart institution should at least produce a return of 4.5%. But then guess its better than your POSB savings.

I won’t spend time comparing between different products, since he didn’t provide me with any. So he can probably follow this to get the rate of return of another endowment as see which one is better.

One massive caution: these are illustrated. it means nothing to the insurer. It is just an illustration to what you can expect. Which means if another insurer gives you a 3.5% rate of return, you have to think whether that is realistic. They can illustrate 7% for all they can, but at the end of the day it is an illustration of non guaranteed returns.

Another caution is that the hope is that the insurer makes sound investment decisions. Bonds should normally form the majority of the underlying for such investments due to their lower market volatility compared to equities. However, one wonders if inflation ran wild like what happen in the 1970s, can the insurer maintain the need for that low level of volatility and at the same time maintain the purchasing power of the customers?

Such is the risk of bonds that you lose your purchasing power in the face of today’s investment climate, where central banks are printing money like nobody’s business. Inflation may be understated. When you invest in endowments, you are essentially relying on the insurer’s management skills.

Taking a look across the board gives you an idea whether you would become a chai tou (vegetable head) or not.

Not convinced projected returns can go down yet?

This is a reader writing in to Straits Times about her endowment:

The Straits Times Interactive, Aug 30, 2006
Endowment-policy maturity benefit shrunk and shrunk

IN 1997, I bought a 23-year endowment policy from Prudential, to fund my eventual retirement.
The illustration showed a projected maturity benefit of $590,000, i.e., an investment yield to maturity of almost 6.5 per cent.

In December 2002, I asked Prudential for an updated illustration, and was surprised – but not too horrified – to discover that the projected maturity benefit and yield had shrunk to $532,000 and 5.7 per cent, respectively. After all, we had just come out of a recession.

Four weeks ago, I asked for a new estimate. This time, I was truly concerned. The projected maturity benefit and yield had shrunk even further, to $444,000 and 4.36 per cent. Granted, the policy offers a death benefit. But, as a single person with no dependants, my reason for buying this policy was not protection but retirement funding.

Given the downtrend in the projected maturity benefit, I have two questions.

What role do such endowment policies play in retirement planning for singles like me, given that a diversified portfolio of equity and bond funds provides far better yields, without 23-year strings attached?

Why aren’t clients automatically sent updated ‘projected maturity benefit’ statements, every two to three years, to keep them abreast of their investment?

Twenty-three years is a long time. If, after paying a quarter of a million dollars in premiums, the yield is not much better than on a fixed deposit, there is going to be a lot of unhappy customers out there. That’s for sure.

Dr Sunita Anne Abraham

 6.5%! no wonder she bought it! I would have bought it if its guaranteed!

 

On Distribution and Adviser Fees

There is 2 parts to the distribution cost: The policy and the Rider.

If I account for the premiums paid and distribution cost together:

Year        Distribution/Premiums 

1                     95%

2                     42%

3                     17%

4                     8.5%

5                     8.5%

6                     8.5%

7                     0%

It is no wonder why this is a favorite product to earn a living as an adviser and as a business. They get paid in present value and not worry about inflation. You have to worry.

I do not know how much an adviser takes out of the distribution cost, but it looks pretty lucrative. If the adviser wants to earn 4000 bucks per month, and if he/she takes 80% of the distribution cost, he will need to meet 40 person like my friend in a year to sell the same kind of policy. You can work out the sums.

The premiums they earn from the rider is rather insignificant. I see it as things to sweeten the deal.

If he manages to pay all the premiums, his "sales charge" will come up to: 3627/40492 = 9%

 

Conclusion

I think i have pretty much laid out the majority that is required for consideration and more. I can’t really advise whether this endowment is good or not since there is no basis for comparison, but i urge folks to evaluate the needs of an endowment, how it fits into your overall plan and the viability of servicing it.

 

At the end of the day, it is the discipline to save that matters most. If you can save on your own, you might be unwilling to pay that sales charge to save since there are alternatives to this.

 

 


Disclaimer: The writer is not a certified professional planner of any sort. All advise shown here are opinions based on the writers interaction with other parties and self-fact finding.  In no way should they be used as the only advice to make final decision. What works for the writer may not work for you.

Do seek a qualified professional to access your needs before purchasing any products. He is not affiliated with any companies mentioned in this article. The writer holds no liability for any mis-advice causing loss of capital or other form of assets due to information gathered from here.

 

 

 

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