If you are shopping around for an Endowment plan, you probably have many questions. And you are not alone.
Does this plan provide the best possible return?
Is this insurance company reputable?
What freebies are they giving with this purchase?
The last question might have made you chuckle, but it’s really more common than you think. Truth is, we would really be better served if we were to look inward and ask ourselves questions of a different nature – more to determine if we are suitable for endowment; rather than if endowment were suitable for us.
The answers may surprise you. Lets leap down the rabbit hole and see how far it leads.
1. Are you a fiscally disciplined person?
Can you resist splurging on impulse? Does a glance of the Great Singapore Sale Ad make your heart pound a little faster? Do you use up your monthly income before the month is up?
If any of the answers are a yes – then you might want to consider taking up an Endowment plan to help force yourself to start saving. After all, the temptation to spend the glorious cash in your account is always there. (“I can always wait for my next bonus to start saving, mah” is a common self-justification technique)
Some people were just born to spend. My friend changes her vehicle faster than you can say “Audi”. She attends sneak previews of Lee Hwa jewellery and also collects branded watches, splurges on clothes for herself and her children. Not that she is a mega-earner, just a regular salaried person. Who regularly maxes out her credit cards. And thinks nothing of it.
This is a perfect example of a person with 0 fiscal discipline. Zilch. Nada. It’s like she has a compulsive need to get rid of money lest it stains her hands.
Endowment plans are perfect for this sort of person – not so much for the returns, but rather just preventing the person from spending every single cent. (Think of a restraining order from the Casino. It works the same way)
Seldom do we encounter such extremes, but you get the gist. If you need a little push or encouragement to start saving for the future, an endowment plan is a great place to start.
And yes, my splurgy friend has endowments in place, bless her.
2. Are you an above average investor?
Before you answer with a resounding yes, take a moment to consider the word: Average.
By definition, it would appear that half of the population is above average, and the other half is below average.
But we all have a tendency to overestimate our abilities in relation to others. Consider the following questions.
Are you an above average driver?
Do you have an above average personality?
Are your judgement skills above average?
Chances are you would also have answered (internally at least) with a yes. Basic human nature at work. No one likes to be thought of as below average. But while it is hard to measure driving skills, likeability or even analytical prowess, investment returns are far easier to measure.
Endowment Plans can return anywhere from 1% to 3% (depending on timeframe) on your money. How do you stack up to that figure? Are you able to beat it consistently? And without undue risk to your capital?
Ironically, it takes a person with above average self-honesty to answer this question properly – which leaves us about 50% of the population. I’ll take those odds any day of the week.
If you belong to a select group of people that consistently generate superior returns on your capital – congratulations: you are far better off investing your own money.
Else just the professionals do it for you.
3. Do you prefer to do your own investments?
Some people prefer to be in absolute control of their destiny. Money included. Its easy to spot them. They have their own stock brokerage account – and use it regularly. They dabble in forex. They know everything about the property market and can spot a good deal when they see one. You get the idea.
For them, handling their own investments is actually fun. It’s fun for them to see their decisions blossom and bear fruit. It’s fun for them to do hours of research and network with the right people. They like the risk and reward.
Conversely, it’s easy to spot people who belong to the other camp. Investing is a chore. Watching the markets is not their idea of fun. They rather spend their time enjoying their lives than thinking about how the Dow Jones will open next week. And to them, money is money – not a scoreboard.
If you enjoy the thrill of doing your own investments – great! Sometimes it not about the money – it’s about being able to seize the right opportunity and watch it pay off from your trading discipline and judgement.
If you rather sleep with your money under a pillow case – then you could consider letting the insurance company grow your money for you.
4. Do you absolutely need your money to be safe?
There are many things in life that we save for. The new car. A brand new sofa. That holiday to Spain.
Many of them are discretionary – and we can do without them. But some financial goals in life are not so flexible. Children’s education funds automatically come to mind. Retirement Funds might also fall under that category – depending on your risk appetite.
So if your financial goal is immovable and an absolute must to achieve, an endowment plan ranks right up there in terms of financial safety – as long as you can commit to it.
But if your risk appetite is larger and you are comfortable to exchange more risk for more potential return, then an endowment may not be the right vehicle for you.
It need not be an “either-or” type of scenario. You could have some goals be more fixed in nature, while others are just nice to have. Endowments are great for those rock-solid, must-have goals.
5. Can you commit to the “lock-in” period of the plan?
More often than not, insurance is a long term commitment. That in itself isn’t all that bad. Insurance also confers long-term benefits. (Think of it like a marriage)
This means that to reap the full benefits of the policy (any policy), you need to be able to commit to the entire length of the plan. Failure to do so can be a pretty pricey affair. (Again, think of it like a marriage)
Endowment plans range from 3 to 40 years in time span, catering to a wide time horizon. So before considering buying one, ask yourself if you foresee any difficulty in staying the course and seeing it through till the end.
If the answer is no – all is not lost. Consider reducing the amount committed or reducing the time span, possibly both. Saving $1k a month for the next 10 years might be a bit hard for some to swallow, but reduce that to $400 a month for the next 8 years – it might become a lot more palatable.
Saying Our Peace
Answering the 5 questions would leave you in a clearer frame of mind to decide if endowment plans are actually suitable for you.
The important thing to note is that endowment plans are merely an instrument. A tool. There are right tools for the job. There are wrong tools for the job. Your role as a consumer merely is to determine if it is the right tool – nothing more.
Do you know of any other questions that are useful to ask as well? Share with us in the comments below – we would like to hear from you!
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