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:
- You contribute an annual cash outflow into this plan of $8813/yr
- Suppose the insured amount is $100,000
- You will have 2 kinds of returns scheme to choose from:
- The first scheme is an annual cash payout
- 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
- 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
- The second scheme is a final maturity cash payout
- 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
- The first scheme is an annual 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
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
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:
- REITS vs insurance plans
- insurance plans vs other insurance plans with different amounts, different maturity, different nuances
- 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:
- Attach critical illness riders
- Have death and TPD benefit
- 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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