These few days 2 of my fellow blogging friends Budget Babe and Christopher Ng have commentated on a social complaint on Facebook by a Lifestyle Blogger Francesca Soh firing straight at Prudential Singapore of an insurance endowment PruFlexiCash experience that she is very dis-satisfied.
So much so she is trying to warn others about it.
What she wants to warn is this:
- Advisers can be unscrupulous in telling you some of the returns are guaranteed when the returns are not
- Your adviser may leave the industry, so make sure the adviser will stay on before signing
- She is not happy that, when she calls the insurance company, they couldn’t advise her when is the best time to drop the plan
Budget Babe’s idea is that we all are foolish before and therefore would like more people to know about it. Chris takes the harsher route, that is, depend on yourself not others when it comes to wealth and protection planning.
In the middle of this, many people commented on what Francesca tried to spread and there are some interesting comments.
I think there are some lessons to be learn from this, and I am wondering if the readers lurking and reading the exchanges take away the right lessons.
1. Insurance Savings Endowments are not the Main Problem
Much of what the readers will be focus on will be on the insurance company’s product PruFlexiCash.
She consulted with friends and realize that the cash back is not guaranteed.
Francesca admitted to signing on due to the attractiveness that she will get back her money very soon.
Now take a look at what Daryl said in the comments:
- The premiums are ridiculously high
- It is tied to a medical plan
- If she cancels within 2 years, his GF will lose about 10k
Irene Myt agrees and said they should just finish paying for 25 years.
An insurance savings plan like PruFlexiCash is not new. Most insurance companies have them for a long time.
They have a few different characteristics but generally they are similar in that:
- Their objective is to help you save money
- You need to commit your money for a period of time be it 2-3 years, 5,10,20,25 years
- You only break even near the end of the last few years
- The returns come from the insurance companies participating funds, which are predominately bond or fixed income based. Fixed income have lower volatility, and the insurance companies are experienced to structure that the policies do not faced a problem that their whole life and insurance savings policy will lose money at the end of the tenure (doesn’t mean its guaranteed!)
- Due to #4, the returns tend to track the returns of available bonds for the period
- Returns depend on the tenure, with the longer ones have higher returns, similar to bonds
- Because investors generally have a tough time purchasing bonds whose minimum denomination is $250,000, insurance endowment is one of the suitable Wealth Machine to get predicable, low volatility returns
- Some endowment offers cash back some do not. Those that offers cash back allow you to reinvest the returns. The cash back do have guaranteed and non-guaranteed components and the reinvesting rate are typically non-guaranteed. If you do not reinvest your returns, your returns computed will be less than if you reinvest your returns, which is shown in the Benefits Illustrations.
- If you based on the guaranteed returns, they typically break even on the total amount of premiums you pay, and won’t earn much excess. The real returns depend on the non-guaranteed portions.
Insurance savings is as such. There are changes here and there, but largely the same.
In 2014, I crowd sourced past friends, family and readers insurance endowments to find out what kind of returns they are getting.
You can take a look at their returns, computed based on Internal Rate of Return (IRR), which tends to be the way to compare across various insurance savings plans, wealth machines, investment assets.
The IRR typically falls between 2.5% to 3.5%.
This is not guaranteed. It is the data. In the future, with lower bond yields in the past few years, the endowment returns will be lower than this.
2. How many people ACTUALLY knows how Insurance Savings Endowment works before buying?
Francesca admits she didn’t know and was naive. I give her props for her self-reflection and acceptance that she should have done better.
Looking at the follow-up comments by Daryl and the rest, they also realized too late.
They basically didn’t understand how the wealth machine that they are putting their money work.
The adviser that they engage with may be competent or not, but let me ask you:
“Even if the adviser is competent and tries to explain it, how much do you think you will remember from a 2 hour explanation today?”
The adviser can only do so much.
I believe all machines that enable you to build wealth, be it stocks, bonds, ETF, REITs, property and insurance savings plans, at a high level requires you to have knowledge to understand what you are getting yourself into.
On a high level, you cannot run away from understanding:
- Future Cash Flow
- Upfront and Recurring Maintenance Effort required
- A certain degree of Competency about the way to build wealth
- Risks – there are always risks
[Related: My mental model for comparing between different wealth machines, stocks, bonds and assets]
A minimum competency of insurance savings is the characteristics breakdown I gave in the previous section.
I frequently ask my friends, do you remember what I share with you guys on Singapore Savings Bonds, Endowment and Index Funds.
The end result is they don’t remember or comprehend too much things. It is just the way it is that people gloss over it, have a comprehension problem of wealth matters, such that they don’t come away understanding these stuff well.
If you don’t understand what was proposed to you, then why did you buy it?
3. If you don’t understand well, Why Entrust 10,20, 25 years of Your Precious Cash Flow to them?
“I decided to check on my plans and only came to realized that I have to hold on the plan until 2038 and its only a “projected return” that I’m gonna risk if I want to continue to risk.”
” So basically she decided to cancel it losing about 10k+ within 2 years and getting back a pathetic 5% cash back.”
Here is the perplexing thing.
Money is hard to come by for most of us, we worked and slogged hard for it.
If you don’t fully comprehend this product, how much they will take as fees out of the endowment, how much they pay out of it as commission, whether you will lose money or not, then why commit so long of your hard earned cash flow to it?
I asked my friends if they will give me $500 for wealth advice, and they wouldn’t commit, because I have no certifications or a reputable brand backing me, but they have no qualms passing it to some adviser friends of theirs that just joined the industry.
And then they come to me being shocked by why the product turned out this way and that.
It is when the shit hits the fan, that they start doing the hard work understanding.
4. It is the Wealth Machine that is important not the Financial Instrument.
When it comes to discussing the topic of building wealth, our conversations tend to revolve around “What did you buy?” . We seldom use the phrase “How did you build wealth over time?”
We all wants to find the holy grail of where to put our wealth :
- Something that earns us more than fixed deposit
- don’t lose money
- don’t need to learn so much
- low risk
- don’t need to do much work.
You don’t want something that needs upfront effort to learn and understand and too much maintenance effort to retain competency.
The truth: Insurance endowment fits very close to that permutation.
To build sustainable wealth, we use wealth machines.
Wealth machines are when we achieve a certain level of competency to use that financial assets/instruments/product to build wealth over time.
We try to setup our wealth machine well, do the adequate maintenance to help dish out the adequate cash flow we desired.
The financial instrument when put in someone who doesn’t know what they are doing, don’t want to learn, don’t want to fail, learn the lesson and tweak their application of the instrument is going to sometimes get good and sometimes bad results.
The above table shows the profitable and non-profitable transactions compiled by The Edge Property for the week.
Notice there are profitable transactions and then there are the non profitable ones.
So many bloggers talk that the alternative to buying insurance savings plan is to invest in the STI ETF and consistently divert your disposable income into it, but does that mean the value of your wealth will not be volatile?
Since 2015, you would have unrealized losses of 20% of the value of your wealth.
For a novice wealth builder who fails to understand how to build wealth well with a financial instrument such as the STI ETF, the result may be worse than an endowment.
REITs have become one well known alternative, for novice wealth builders who are looking for a return higher than fixed deposits, without the constraints of insurance savings plans.
This is the latest table summarizing the yields, and data of the industrial REITs.
Sabana, give an annual dividend yield of 9%. 3 Years ago it was also yielding around the same dividend yield.
This would look enticing enough. Why did the dividend yield stayed almost the same?
If you expect this reit to be “fixed deposit” like and give you 9% versus the 0.25% with no capital loss, you are going to be in for a shock.
This is because its dividend per share fell and so has the share price, since the asset value is a reflection of future cash flow, which is getting lower and lower.
I have listed some REITs with good IRR for the past few years of you invest lump sum or dollar cost average into REITs:
- Keppel REIT – 8.33%
- CapitaRetailChina – 11.3%
- Ascendas India Trust: Comparing Lump Sum vs DCA – 2.19% vs 11.97%
- Frasers Commercial Trust: Comparing Lump Sum vs DCA – 4.25% vs 14.48%
There are work to be done, competency to be build up in investing. Failure to do it well and you don’t have a wealth machine.
You have wealth destruction.
5. Too much Trust on Others and Too Little Ownership of Responsibilities
At the end of the day, the flaw of this insurance model, is that we look for people to trust the responsibility of advising and steering our wealth and protection.
Yet we placed the trust in the wrong sort of folks who are not qualified, inexperienced. The solution isn’t just about compliance but the way professional advice is provided.
It is difficult to find advisers that have less of an economic incentive to sell you instruments that do not meet your needs.
There are qualified and good advisers both that are commission based, fee based and fee only.
Wilfred Ling have been doing fee-based planning for protection, wealth management and wealth de-accumulation .
Providend have been providing fee based planning for protection, wealth management and wealth de-accumulation as well.
Yet, most would not pay for their services, to gain the right advice, make better choices by putting their money in a more sound plan because they cannot adjust to the concept of paying a fee for professional advice.
In this time and age, where information is more readily available, you have less excuse to say you cannot build up an a preliminary understanding of wealth building and protection.
If you take ownership to take care of your own wealth management and protection, you have resources like
For Wealthy Protection and
For an avalanche of unit trust
At the end of the day, we need to take an extreme ownership of our protection and wealth building, if we do not want to sub-contract most of this work out.
This have been lacking much if we were to judge by this reflection from a lifestyle blogger and the comments posted.
- $50,000 Portfolio to Supplement Lifetime Critical Illness Coverage. - June 5, 2023
- The Beauty of Having Low Essential & Basic Expenses - June 3, 2023
- Singapore Savings Bonds SSB July 2023 Yield at2.82% (SBJUL23 GX23070H) - June 1, 2023
Sunday 10th of July 2016
Sunday 10th of July 2016
hi smk, what do you mean by nice advertorial?
Friday 1st of July 2016
I would like to get some views. I have a Living Policy that I have been paying for the last 15 years. It has accumulated some cash bonus over the years.
Is it beneficial for me to use my cash bonus to pay my premium? I am aware that this will reduce my final amount of the policy when a claim is made. However, from a "financial" point of view, will this reduce my final amount disproportionately? Let me put it this way, given that I have paid for the policy for so long, if I can reduce putting more money into the policy without reducing the returns (ROI) from it, I would like to do so.
Sunday 19th of June 2016
If she cancels within 2 years, his GF will lose about 10k
> cut loss early and look for other wealth vehicles (zero sum) > hopefully gf will mature more financially after that. Myself lose about 5k and cut loss immediately after independent agent review. > using 5% or less of annual income to manage (hedge) all risks. (Probably of risk at my age is about 5%). > payout at the end of cycle not impt to me as already found other vehicles of wealth (besides reits).
God bless & enjoy the journey.
Sunday 19th of June 2016
Oh i see. I think this is sunk cost theorm at work. not everyone is shrewd as you when it comes to managing money.
Friday 17th of June 2016
I am a new visitor for your blog, been reading for a month now.
Back to the topic on insurance. I own a couple of them (Life, Endowment, etc). Every year the various companies would mail the annual bonus declaration. This year I got curious and started to ask my advisor on how to translate these declarations.
Basically, checking Bonus Declaration vs the Benefit Illustration. Did the insurance companies fulfill their part in the projected returns. I think nobody tried to ask that! I assume many just buy and forget?
Fortunately, I am blessed with a good advisor who do yearly reviews (although I didn't buy!)
Friday 17th of June 2016
hi Alex, i think you are a tough customer and any advisor who is not competent is going to get it from you. I think for most, they won't even know that is the method to evaluate. they probably think the way to evaluate is whether they are making an absolute amount of money.
Friday 17th of June 2016
Interestingly you include insurance endowment in the "Wealth Machines" i try to look for a insurance endowment plan for my legacy planning but so far no insurance agents can convince me. What is your take? (Always like to learn from "The Good, The Bad and The Ugly). Ha! Ha!