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Being well-endowed is not good for your financial health

Posted 27 March, 2016 by Surely
in Opinion

The following scene is not uncommon:
Your insurance agent meets up with you for a coffee.
After a financial review, you come out of the meeting with a new endowment policy.

Let's spill the bean on endowment policy!

Let’s spill the beans on endowment policy!

You are pleased with your purchase as your adviser had assured you of its returns.
Years later, when your policy expires, you receive a cheque from the insurer.
You stare at the amount and realise it is an amount far less than expected.

The Big Picture

In 2014, a modest 16.6% of the non-ILP policies sold in Singapore were actually endowment plans.
The pie chart shows a nearly equal proportion of term, whole life and endowment policies.
Others refer to hospitalisation, personal accident insurance plans, etc.

pie number of policies

When you peek at the statistics by premium size, the picture looks very different.
Now the main money maker of the insurance industry is actually endowment plan.

pie premium
If you are wondering why financial advisors and the insurers themselves like to push endowment policy, the above pie chart has illustrated the reason quite clearly.

Is it good for you?
Let’s dissect the reasons for buying endowment to find out!

Forces you to save

This piggy bank demands that you save every month.

This piggy bank demands that you save every month.

This is arguably the most common reason given by advisors all around the world.
Too much of your money is going to your entertainment, branded items and other lavish forms of spending.
“You need to start saving up for your retirement or kid’s education”, they say.

It may possibly work.
Having the premium deducted one day after your payday might be an effective method of forced saving, if you are not disciplined with your money.

However, you do realise that you can take a policy loan.
Worse, you can surrender the plan too.
Thus, it may not be a perfect way to enforce saving but it may still be viable.
We are on the fence on whether this works.

Risk-free saving

Making sure your money is locked up.

Making sure your money is locked up.

The maturity value is partially guaranteed, with the non-guaranteed portion totally dependent on your insurer’s life fund performance over the years.
At least you have some of your capital preserved.
All these are relatively risk-free.

Default risk still remains – that is if your insurance company goes bankrupt.
Of course, SDIC will be backing up your policy when that occurs.
Our take? This reason is rather iron-clad.

Good returns

Like a crop, your harvest is a big unknown.

Like a crop, your harvest is a big unknown.

It is better than leaving them in a saving account.
Or the Milo tin.
We cannot disagree with that logic.

On the other hand, we wonder if that is true.
We heard so much about the low maturity value in the papers.

A check on our Compare section shows that the guaranteed maturity value is usually lower than the total premium paid.
Therefore, any non-guaranteed portion is unlikely to be so ample that it can give you a good 3-5% return.

Protection value

Fix your glasses if you think that $5,000 coverage is sufficient.

Fix your glasses if you think that $5,000 coverage is sufficient.

Some may point out that there is an insurance component.
You are getting covered here while saving.
Try getting that from your bank’s fixed deposit!

This is contrived reasoning.
With the low protection value (kept low for more savings), it is hardly worthwhile.
If you have taken a low-cost term insurance, the protection is much more.

In Sum

We do not rate endowment plans highly.
Returns and protection value are piss-poor when compared to other alternatives.
Singapore Saving Bonds do offer a better interest while having the same risk-free characteristic.

We do see a certain scenario in which it may be useful.
You may have a low-risk appetite, with little financial knowledge and have a need to save up for the education funds of your children.

calculator

On the other hand, if you are reading this, it is a good chance that you have the motivation and mental aptitude to learn about various financial instruments.
Weigh up other options so that you will not pay an opportunity cost for it.

If you have any story or comments about endowment plans, please share it with us.
We will love to hear all your views, especially the opposing ones.

www.ClearlySurely.com aims to eradicate the knowledge gap between consumers and Life Insurance. Our Vision is that one day, every Man, Woman, and Child will be properly insured.

  1. Surely

    As a general rule, we do not encourage surrendering of insurance policy.
    You may forfeit or lose a substantial amount of your already-paid premium.
    On the other hand, if your endowment is a long term one, you may suffer from a large opportunity cost.

    Perhaps you may refer to more opinions before making your decision.
    This link in our forum has discussed a similar topic before.

    Eventually you need to weigh between the possible loss due to surrender & the possible opportunity cost of maintaining the policy.
    You and only you are the best person to make the decision.

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