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What is the Projected Internal Rate of Return of AIA SmartRewards Saver Insurance Endowment?

I was at a stage where I was unsure if insurance endowment plans are really that bad for wealth building.

So I crowd-sourced from friends, family members, relatives their past matured policies. And I put them in one nice article.

The summary is shown above.

While the duration is different, the pitch by agents are different, the amount of premiums are different, if we compute the internal rate of return (XIRR) of the stream of cash inflows and cash outflows we can compare against each other.

So a reader was thinking of purchasing this AIA SmartRewards Saver.

I told him I cannot added it to this list as it hasn’t matured yet.

This list only shows the real results not the projected ones.

However, I can value add to him to calculate the projected rate of returns based on what the insurance company pitched.

What AIA SmartRewards Saver is About

The AIA SmartRewards Saver is an insurance endowment plan.

It’s primarily objective is to help you save. However it seems that there is an insurance element to it.

The simple idea for this plan:

  1. You contribute an annual cash outflow into this plan of $8813/yr
  2. Suppose the insured amount is $100,000
  3. You will have 2 kinds of returns scheme to choose from:
    1. The first scheme is an annual cash payout
      1. from the 2nd year onwards till the last 2nd year, you will get a guaranteed cash payout coupon equivalent of 5% of the insured amount
      2. at the last or maturity year, you get a guaranteed maturity cash payout of 25% of the insured amount  AND the non guaranteed cash payout
    2. The second scheme is a final maturity cash payout
      1. at the last or maturity year, you get guaranteed maturity cash payout, which is equivalent to 120% of the insured amount AND the non guaranteed cash payout

So this is a savings plan.

Suppose the assured passed away before the maturity year, the plan will payout the higher of the insured amount (in this case $100,000) or the total premiums paid up to that point.

So if the assured passed away at a certain point, usually at the earlier years, the plan provides a payout higher than your premiums paid.

In the case of the reader, he provided me with the following projections

Scheme 1:

Yearly premium : $8,813

Cash coupons at $5,000 yearly and $25,000 last year but provided not cash out to get above non guaranteed amount.

should i cash out all coupons
Guaranteed : $25,000
Non Guaranteed @3.25% : $72,605
Non Guaranteed @4.75% : $90,066

Scheme 2:

Yearly premium : $8,813
Duration : 21 Years
Guaranteed : $120,000
Non Guaranteed @3.25% : $103,592
Non Guaranteed @4.75% : $127,887

So how do we determine whether the plan is worth it from a saving and wealth building perspective?

The Internal Rate of Return (XIRR) of AIA SmartRewards Saver Scheme 1

In investments, we usually compute the internal rate of return. That is how I was able to derive a comparison between:

  1. REITS vs insurance plans
  2. insurance plans vs other insurance plans with different amounts, different maturity, different nuances
  3. Artwork and Stocks

Basically, you can imagine that the IRR is the “annual interest” that you are getting from this SmartRewards “bank” if you keep putting money into it.

The first scheme is the one with the annual payout follow by a 25% of insured guaranteed amount ($25,000)

Usually, insurance company provides 2 projections, the conservative one at 3.25% investment returns, and the less conservative one 4.75% investment returns.

In XIRR, we tried to base it on the cash flow that they say will come.

The following shows the XIRR of Scheme 1 with 3.25% projected investment returns:

In year 21, you will receive  $25,000 plus the non guaranteed portion.

The XIRR is 1.17%.

To know whether this is rewarding enough, we compare it to some risk free return. That is usually the 10 year Singapore Government Bond rate.

In the table above you can see that the 1 year to 10 year Singapore Government bond rates have a yield to maturity of 1.5% to 2.48%

The XIRR of the AIA SmartRewards look very unappealing. You could have just kept buying 1 year maturity Singapore government bonds!

Even the Singapore Savings Bonds (SSB), which is  based on Singapore government Bonds yield 1.6% to 2.39% for the month of May 2018.

If the projected investment returns is 4.75%:

The non guaranteed returns can grow at a higher rate of return and in this case the XIRR becomes 2.53%.

This is slightly above the 10 year SGS bond rates and SSB bond rates of 2.488% and 2.39% respectively.

The Internal Rate of Return (XIRR) of AIA SmartRewards Saver Scheme 2

For scheme 2, the cash flow is different. You will only receive something at the end.

The following shows the XIRR of Scheme 2 with 3.25% projected investment returns:

The XIRR is 1.69%.

The returns are higher than if you take cash payout. This is because the would be annual cash payout gets to compound (it might or might not be at the same investment rates, so take my projection with a pinch of salt)

The following shows the XIRR of Scheme 2 with 4.75% projected investment returns:

Strangely, the XIRR is only slightly better than Scheme 1 at 2.58%.

Some Other Considerations

From what AIA is projecting, not good!

However, they tend to litter some other benefits.

These plans works best if the assured passed away earlier than later.Then your insured payout is more than the savings. The actuary at the insurance company assess that the risk of that event is low.

This this is a savings plan that you can:

  1. Attach critical illness riders
  2. Have death and TPD benefit
  3. Premium waiver of critical illness and TPD should you choose to attach the critical illness riders

Look at this another way, should some out of wack probability stuff happened to you, you get the premium waiver and do not have to pay subsequent premiums.

I wrote about premium wavier last time that it is an insurance on the stream of premiums you paid. You can read up about it.

You essentially pay a premium for this insurance cover so its not something special.

You can get a Simple Term Insurance Coverage from DIY Insurance

In this case study, the sum assured is $100,000.

It looks like a good benefit.

However in truth, you can look at it as replacing this plan with a Singapore Government bond ladder and a $100,000 term life insurance.

DIY Insurance, which is an online portal that lets you compare different kinds of insurance against their peers, and lets you buy it off the portal. The folks behind it are Providend, which is a fee-only financial advisory firm.

I covered on a recurring basis the cheapest term life insurance and critical illness plans.

The table above summarizes the premium cost from the most affordable insurance company.  While the premiums are for $1 mil, you can get less coverage.

So if you are 35 years old, your annual premiums will be $1481 /10 = $148/yr.

In truth, if your coverage is less than $400,000, DIY insurance will advise you not to get it from them, but to get it directly under Direct Purchase Insurance (DPI). It is a scheme which forced the insurance company to offer a non-advisory term and whole life insurance directly from the insurance company.

The premiums tend to be cheaper. And it is likely going to be less than the $148/yr.

$148/yr is 1.67% of your $8813/yr premium.

So are any of you guys on this plan? What are your thoughts?

This article is a collaboration between Investment Moats and DIYInsurance. The views are of InvestmentMoats.com alone. I am an existing customer of DIYInsurance and recommend DIYInsurance due to the quality of the product, the service and the integrity of the people behind it.

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Alan

Friday 27th of April 2018

Hi Kyith,

This might not be related to the blog post but what are your thoughts on the acquisition on 21 properties and the increase of the portfolio size of Frasers Logistics by about 50%. announced recently ?

I haven seen a move so aggressive before even though its yield accretive. Last comparable was ART ,

Kyith

Saturday 28th of April 2018

Not sure if I wanna write about it since a lot of people shared their views. It increases the number of properties, expose more regions. The CAP rate is lower than other regions. I think it gives the REIT a better profile and benefits the manager more than us. But we should see the quality over time.

FC

Monday 23rd of April 2018

historically, how many of the plans pay out 3.25% - 4.75%?

Financial Planners will try to promise you the world, saying they will fulfill the non-G component.. but there is reason, why it is stated as non-G in the first place.

the last time i did a comparison among various plans, i only took into consideration the guaranteed (G) component. and there were no plans which can beat the CPF. at best only match the CPFOA of 2.5%

yes, granted it is locked up till 60+. but thats the point of savings plan? since most of them require you to be locked up for up to 25 years. personally, for me, unless the plan can better the CPFSA of 4%, (which is somewhat 99.9% guaranteed, until the policy changes) otherwise, i would not bother too much with saving plans from insurers.

btw, for AIA's 2.X% xirr, might as well dump into the citibank maxigain , which after you step up to the max 12 counters, is already 2.X% too. (fluctuates due to the sibor component)

the next best, as you mentioned will be the SSB or SGS. at least its guaranteed for the next 10 years.

Kyith

Tuesday 24th of April 2018

Hi FC, i think i have some beef if you are looking at only guaranteed. its not suppose to be as such. its like you are looking for an investment with guaranteed returns and say the upside is "not required" but "good to have". I do not think it is. the 3.25% and 4.75% is not the returns that you get but the returns of the participating funds.

we are probably saying this now because of how visible and transparent the ssb and sgs is. but think about it. if the rates are higher, wouldnt that mean the bonds the funds invest in from now onwards, newly vested be higher as well?

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