Friday, April 11, 2008

Best endowment plan

I often hear people asking “What is the best endowment plan?” in forums. In a short answer let me say there is no such thing as the best endowment plan. Endowment like any other kind of investment instruments does not guarantee its future performance. An endowment plan that yield good return in the past may not yield the same return in the future.

What is an endowment policy? It is basically a saving plan bundled with insurance protection. Before getting an endowment policy, ask yourself what is the purpose of getting one? If your objective is to save up a certain some of funds for usage after twenty years, then I recommend you to get a pure saving plan. If your objective is to have an insurance coverage, then get a pure insurance plan. Mixing your objectives with this kind of combo plan does not equate a good plan. Let me give a few disadvantages of owning an endowment policy.

  1. You will incur high distribution costs which include commission fees to agent during first few years of policy
  2. Since a major portion of your premium goes into saving and a small portion goes into insurance, your sum assured is always pathetically low
  3. As endowment policy is a long term plan, early termination will result in losses. That means you may not get back all your premiums paid depending on the year of surrender. In other words, your savings is locked for a number of years
  4. An endowment policy always projected a high return per annum which is not guaranteed. The actual return is most of the time less than projection

Now the question is, “Is there an alternative solution to an endowment plan?” The answer is definitely a YES. However this method involves a little bit of do-it-yourself approach. Let me discuss your saving and insurance portion separately.

The money paid for the saving portion of an endowment is actually invested in bonds and equities by the insurance company. That is how the insurance company is able to generate returns for your savings. There is no secret about that. So why not invest the money yourself into bonds and equities? Depending on your risk appetite and investment horizon, you can set up a diversified portfolio consisting of global equities and bonds fund. I shall not dwell into bonds and equities as it requires a separate topic.

However for the less savvy individuals, I would recommend setting up a regular savings plan with a balanced fund. Visit Fundsupermart Funds Selector and select Balanced under main categories, you will see a whole list of available funds. I would recommend any of the following balanced funds:
DWS Premier Select Trust
First Sate Bridge
UOB GrowthPath series

As for your insurance portion, you can set aside a small sum of money into a term insurance. You might want to read a business times article on "Good time to shop for term assurance plan" to assist you on your selection. Depending on your age group and length of coverage, you can get a $100,000 insurance protection for less than $20. I would recommend you check out the following term insurance:
NTUC i-Term
Aviva SAF Group Term

In conclusion, the alternative method I introduced eliminates the disadvantages of (1) and (2) of an endowment. You may choose to withdraw your investment early if you see them profitable and thus eliminates disadvantage (3) of an endowment. As for the item (4), you need to be aware that any forms of investment available out there are not able to guarantee you with good and positive returns. So why not invest yourself and control your own money.


gerimegaly said...
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gerimegaly said...


you are right about Endowment Plans and their projections. However, having said that, there is one plan in the market which offers a minimum Maturity Guaranteed Return of $3.20% p.a. over a 15 yr period. And upon Maturity of the plan, it projects a total of about 4.32% p.a. Decent returns, I would say...

Mike Dirnt said...

i think i know which plan. but still it is not worth to lock your money for a number of years just for a small returns. worst still it is not guaranteed.

gerimegaly said...

Oh, why do you say it's not guaranteed? 3.20% is the minimum maturity guaranteed.
Anyway, ultimately I think diversification is key, in trying to achieve wealth accumulation.

Mike Dirnt said...

sorry my mistake. if i got the company right, i know the company got good children education plan as well

but still the other disadvantages still apply. :)