The Pros and Cons of Selling Your Endowment Plan In Singapore

Pros and cons of selling your endowment plan to third party investors

An endowment plan is a kind of policy where you contribute an amount of money over a fixed period of time. Upon maturity, you will obtain a sum of money which may or may not be more than what you put in over the entire time period. In addition, this plan is commonly promoted as a way to save for specific life-stages. However, given the fact that you have to continuously pay the premium and surrendering the plan prematurely incurs a huge loss, this plan is a constant topic of debate and discussion.

Earlier on, we wrote about what to do if you think your endowment plan might be a mistake. One of the things you can do is to sell the endowment plan to a third-party investor. In this article, fundMyLife discusses the pros and cons of selling your endowment plan.

Pros of selling your endowment plan

#1 Better cash flow

As mentioned, endowment plans require you to stay committed over a period of time. Typically, this can range between 5 to 20 years.

Liquidity is an issue since your money is locked up in the plan. Some endowment plans have a timed payout structure that provides flexibility to policyholders. However, it becomes more stressful when you have unexpected episodes in your life that requires more liquid cash. Furthermore, over time you might be more financially savvy and you are confident that you can do better investing the money elsewhere.

By selling your endowment plan, the most obvious upside is that you immediately free up a sum of money that was put into the plan. In addition, you no longer have to commit to the usual monthly payments. This frees up your money for either other uses, or you can redirect the money to other forms of investments.

#2 More money obtained compared to surrendering

Suppose you can no longer afford the monthly payments, paying the premiums becomes a chore and you lose your peace of mind. If you stop payment, the policy lapses after a while. A premium holiday or a policy loan may alleviate the cash flow problem for the time being but will not solve things in the long run. Furthermore, doing these short-term measures will decrease the payout upon maturity regardless.

Typically, when you have no other choice, you can opt to surrender your policy for a sum of money back, as shown by the Benefit Illustration. However, surrendering your policy often nets an abysmal amount compared to what you have put into the premium so far. Instead, by selling your policy, you may obtain 5-20% more from the third-party companies compared to surrendering it alone.

Cons of selling your endowment plan

#1 Loss of protection and benefits

Endowments generally come bundled with a form of insurance coverage. There are plans that add that you do not require any medical check-up as well. If you purchased an endowment with death, terminal illness, or total disability protection, selling your endowment plan means you will lose that benefit.

However, if you were already adequately insured by other insurance plans, you should be fine. That said, if the endowment was all you have it is wise to obtain low-cost protection, e.g., term policy.

#2 Readjustment of your financial goals

Ideally, when you purchased the endowment, it was meant for a particular financial goal – retirement, education for the children, or even a second property. However, once you sell the endowment policy, it implies that the journey to what you were aiming for has taken a short detour. As such, it is prudent to discuss your readjusted financial goals with a trustworthy and experienced financial adviser.

On the other hand, given how rampant endowment plans are sold, chances are that you might have unwittingly purchased this without knowing why. All the more it is important to revisit the financial conversation with someone else more trustworthy after selling your endowment plan (hint: it’s the advisers on fundMyLife).

For Your Information

Wondering where you can sell your endowment plans? Here are some of the companies that can buy them:

  1. REPs Holdings
  2. Purvis Capital
  3. Conservation Capital
  4. First Grand Capital

It’s useful to get the latest information of your policy to get the surrender value so that you can get quotes from those companies. Note that these companies usually buy plans which are close to maturity, e.g., a 20-year plan with 5 years to go. However, it is still worth inquiring to see if you qualify – our research shows that the companies do buy them early as well. Another thing to note is that endowment plans paid for using CPF or SRS are not eligible for selling.

Conclusion

That’s all we have folks. Hopefully you have more insights into selling the pros and cons of selling your endowment plan. Still have more burning questions about your finances? Head on to our main site and ask our curated pool of financial advisers!

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

The Pros and Cons Of Buying An Endowment Plan In Singapore

This article first appeared on DollarsAndSense.sg

Commonly sold by both insurance agents and personal bankers, people in Singapore have varying degrees of understanding when it comes to endowment plans, sometimes, even after they have bought one.

Even among finance professionals, there may be different understanding of what an endowment plan is, and isn’t. Some advisors may look at endowment plans as a type of “forced savings”. Others may think of it as a tool for investment, while some may see it as an insurance policy.

In this article, we will look at some of the pros and cons of an endowment plan.

As there are many different types of endowment plans in Singapore, all of which, offering its own advantages (and of course, disadvantages), do note that our article may be a generalised take on the category as a whole.

Also, any reference we make in this article to actual products is simply for the purpose of education, and in no way, representing our approval or disapproval of these products.

Let’s start with some of the pros.

Pros Of Endowment Plans:

#1 Guaranteed Returns

Compared to investing in the stock market, endowment plans generally come with some form of guaranteed returns. As long as you pay all the committed premiums and hold on to the policy till maturity, you will receive the guaranteed returns.

Here’s an example based on the AIA Smart Growth (II).

Source: AIA

The illustration above is self-explanatory. The policyholder will have to commit to the annual premiums of $2,483.60 per year for 12 years, paying a total of $29,803.20. The policy matures after 21 years. If the policy is held till maturity, there is a guaranteed return of $35,000.

In other words, the minimum amount the policyholder will get is $35,000, regardless of the performance of the market.

If you were to invest on your own, there is no guarantee that you will be able earn additional returns, or even retain your principal. In extreme cases, you may even lose your entire principal.

#2 Non-Guaranteed Returns

Non-guaranteed returns can be seen as both a pro and a con. For now, let’s look at it as a pro.

Compared to other instruments such as savings accounts and fixed deposits, endowment plans are able to generate higher, non-guaranteed returns for their policyholders. These non-guaranteed returns is dependent on the performance of the insurer’s participating fund.

For example, in the case of the AIA Smart Growth (II), policyholders will earn an additional return of $19,028, if the participating fund achieves a long-term annual return of 4.75%.

The ability to generate additional, non-guaranteed returns, makes an endowment plan more attractive than a regular fixed deposit. This is especially so if the guaranteed returns from the plan already provide a similar return to what fixed deposits would be giving. In some sense, it’s almost like getting the fixed deposit returns plus a “bonus” non-guaranteed return, subject to the performance of the insurer’s participating fund.

#3 Some Insurance Coverage

Most endowment plans provide some form of insurance coverage as part of the overall benefit of the plan.

For example, Great Eastern provides a Flexi Endowment plan that offers coverage against death, terminal illness or permanent disability for the duration of the policy term. This provides some form of insurance coverage, on top of both the guaranteed and non-guaranteed benefits offered by the policy.

This is in contrast with regular investments that do not provide any insurance coverage in the event that a person passes on, even while they are investing for the future of someone important to them.

As such, endowment plans are popular among parents who would like to save and invest for their children’s education, since there is a guaranteed fixed amount given to their child, regardless of what happens in the future.

Cons Of Endowment Plans:

#1 Guaranteed Return Does Not Equate To Guaranteed Principal

One misconception to avoid when buying an endowment plan is to be assuming that the premiums you pay for the policy would automatically be guaranteed, and that you will receive all of it back, plus some extra, when the policy matures.

This is not always true. And you need to understand this for yourself to avoid major disappointment in the future.

Here’s an example based on a Straits Times article.

Source: The Straits Times

From the benefit illustration above, you can see that while premiums paid to date is $200,378, the guaranteed return at maturity is only $189,000. This may not look too attractive for a person who buys an endowment plan hoping to get guarantee returns from it.

At the same time, the death benefit in the example above is substantial. If death occurs during the policy term, a payout of $189,000 is given. In a way, the lower guaranteed payout is somewhat balanced off by the fact that there is significant insurance coverage during the policy term.

At the end of the day however, you need to ask yourself what is the reason for buying an endowment plan in the first place.

#2 Long Commitment Period

Typically, most endowment plans tend to have a period of between 10 to 20 years where you have to stay committed to the plan. This means 1) making prompt payment on your premiums and 2) not surrendering the plan.

Penalty for early termination of your endowment plan can be very costly. If you surrender your policy within the first few years, you may even get nothing back from your policy.

In our view, if you are unsure of whether you will be able to commit to the entire duration of an endowment plan, you would be better off just using a savings account and to do your own investing.

#3 Actual Investment Returns Are Lower Than Long-Term Returns Earned

Lastly, you should remember that the projected investment returns earned by an insurer’s participating fund does not equate into the actual return that you will be getting from your endowment plan.

For example, in the case of the AIA Smart Growth (II) plan, if the participating fund achieve an investment return of 4.75% per annum, the actual return to policyholder is 3.85%.

Endowment plans offered by different insurers will have their own benefit illustration. For example, here is an illustration extracted from NTUC Income.

Source: NTUC Income

Long-Term Average Return: 4.75%

Actual Return To Policyholder: 2.99%

By now, we hope that you understand enough about endowment plans to know that this does not mean the AIA plan is better than the NTUC Income plan, just because the spread is smaller between achieved returns and actual returns.

Rather, the two policies are not identical and hence, a like-for-like comparison is not possible.

Our point here is that if you are intending to buy an endowment plan for investment purposes, you should know for yourself the difference between long-term average return achieved by the insurer, and the actual returns that you are going to get.

Otherwise, you might unknowingly be buying a product that is more insurance-based, rather than one which is investment-based.

Summary

Here are the pros and cons of an endowment plan which you should fully understand before you even consider a policy.

DollarsAndSense.sg is a personal finance website that aim to help Singaporeans make better financial decision.

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

fML Case Study: Aligning Expectations With The Right Financial Advice

fundmylifestories

[3 min read]

Sometimes, getting professional financial advice can be tough – it requires the right expertise, the right experience, and most importantly the right adviser him/herself. Without any of the three, things may go awry when financial goals are not achieved, which does happen.

In this article, fundMyLife follows fML user James* who asked a burning question on our site on an AIA plan. Our AI engine connected his question with one of our fML advisers, Roshan Belani of AIA. After connecting with Roshan on fundMyLife, James and Roshan met up for an appointment. Roshan first spent some time acquainted with James on their first meeting, and they bonded over investing – something that Roshan is an expert of.

Unmet expectations in plan bought

Upon conversing, Roshan discovered that James’ initial goal was to accrue a set amount of savings for a particular financial goal. However, the plan which he was sold by another adviser turned out to be an ILP, and was unsuitable for two reasons:

  1. The plan protected him more than he needed
  2. The premiums he paid in the first two years went to protection first, instead of investments

The plan was not going to deliver what he wanted – savings – in the long term as a large chunk of the premium went to insurance component. As such, his goal was unmet. The initial premium was $500/month, which he reduced to $300/month in the past already.

Weighing the options

James was faced with a dilemma:

  1. Keep the plan going and not reduce the premium
  2. Reduce the premium to $100/month and free up more money for investments

Roshan noted that each of the options had their pros and cons. While the plan wasn’t what James originally wanted, the protection offered by the plan under $300/month was adequate and sustainable. Furthermore, the plan served a purpose by locking down on his health from two years ago – future insurance plans may be slightly more expensive. On top of that, reducing it to $100/month would also result in less insurance coverage. However, the second option provides James with more freedom to do with what he wants to do with the money.

In addition, Roshan also looked at other areas of James’ risk management and gave his perspective on those as well. For example, critical illness coverage, personal accident plans, etc. Impressed by Roshan’s professionalism and expertise, James immediately requested for Roshan to take over his AIA portfolio. Currently, it is an ongoing conversation where Roshan will further assess James’ future needs and identify gaps in finances be it investments or insurance.

Conclusion

It is important to engage the advisers who can give the right financial advice. James found himself in a quandary when the plan he bought did not align with his goals due to unsuitable advice. fundMyLife was pleased to have been able to connect the question James had to Roshan and we are committed to making sure more users like James have access to the right financial advice, by the right financial adviser.

If you find yourself in the same situation as James, or you’ve questions on financial planning, head on to our main site and ask our curated pool of financial advisers! Alternatively, you can also browse our individual advisers’ pages – just click on their profiles and you can ask them questions directly from their profile pages.

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

*name was altered for privacy

5 Alternate Side Income Streams for Anyone With Internet

side income streams featured image

By Cindy Teh, edited by Jackie Tan. Cindy is part of fundMyLife, the platform that connects financial planning questions to the right advisers.

Let’s face it. In this day and age, having a single source of income is no longer enough. After paying rent and bills, what else is left? Setting up multiple income streams is the smart thing to do, no matter how old you are. Here, fundMyLife would like to explore slightly different (may be weird but completely legal) ways of making a little extra cash on the side.

Does not involve walking dolls with hands for heads, we promise!

Once you actually start thinking this through, there are about a million ways to make money. You could clean somebody’s house, set up a stall at flea markets, work at Starbucks on weekends, walk someone’s dog, drive Uber/Grab…the list goes on. So, we’ve decided to only focus on things you could do from home, as long as you have an internet connection. We’ve also ranked this list in terms of conventionality; from the obvious, to the you-can’t-be-serious (we are!).

Without further ado, fML presents…

#1 Freelancing

Sell any skills you have online. Graphic designer? Provide design services. Fast typist? Do data entry. Good at organising things? Become a virtual assistant.

But that’s obvious, right?

Well, you could also be a Date Concierge and help busy couples plan romantic dream dates. Or a Calligrapher, if you have sweet handwriting skills. How about working as a Baby Name Consultant? (fyi, the baby names consulting business mentioned in link has closed down. More customers for you, I guess!)

Side note, “Lucifer” is a banned baby name in New Zealand. And Sweden doesn’t allow kids to be named “Superman”.

Freelancing means you could work from home.

#2 Writing

This is such a BROAD industry that it deserves its own point. You can write for corporate companies, social media, blogs, or help university students with essays/assignments…

OR you could write love/breakup letters, poetry, and ahem, adult content (read: sex). The possibilities are endless. You could write about topics YOU know a lot about, like food, gaming, TV series, shopping, fishing… Or you could write How-To guides e.g. How To Fake MC / How To Cook Chicken Rice / How To Lose Weight / How To Tie A Tie… You could also write product reviews for products you’ve bought, or fake reviews (note: this is ILLEGAL most of the time).

Today I’m gonna write about how much I LOVE BANANAS!

#3 Online teaching

Tutor people in any subject you’re good at, from Algebra to HTML to the Piano. Work whenever you want. Impart knowledge. Empower humans. Save the world. Find a cure for cancer. Go to Mars. Woah…that escalated quickly. Okay, we’re getting ahead of ourselves here. Let’s go back to teaching online. Besides tutoring, you can also create courses for sites like Udemy, OpenLearning, and Teachable. You’ll need some technical skills so you could record yourself, or your computer screen, and edit the footage into short bite-sized videos for students.

The difference between online tutoring and creating courses online is that for tutoring – you only get paid when you’re teaching. So the money’s gonna stop if you take a break from tutoring. For online courses, you’ll have to invest quite a bit of time upfront in designing your course, filming it, and then promoting it. But you only have to do it once! Then sit back and collect the money as people start signing up for your class.

We’re sure you can charge more than that.

#4 Cryptocurrency

We get that this is a contentious topic. As with any kind of investment, there are always risks involved when you play with money. Make sure you do your research before sinking cash into anything, and always only spend what you can afford to lose. #commonsensefinancialadvice

Now that we’ve got that out of the way, let’s talk about the various ways you can make money from the hottest buzzword of the year. We’re not going to explore all of them, just the easiest methods. First of all, there are thousands of cryptocurrencies around. The most well-known ones are Bitcoin, Ethereum, and Litecoin.

The easiest way to make money with crypto is to buy and hold, aka long-term investment. You buy x amount of coins and hold it for months, years, however long you like, and cash out when you decide the returns are big enough.

Another method is to trade crypto, but you’ll need a certain level of knowledge and expertise in the market to make money. You also have to keep a constant eye on global crypto news/trends and what’s happening in the industry.

One more thing you could do is to take part in ICOs, which is like an IPO where companies sell their shares to the public. With ICOs, you buy coins at the offering stage, and sell them if/when their prices go up. You could also choose to invest in companies/products/technology you truly believe in and want to support, then reap the benefits when these companies become more established down the line. While a successful ICO could raise millions of dollars, ICOs are also known as the “wild west” of the crypto world. They are unregulated, which means scams and fraud could happen. There have been cases where ICO startups vanished after collecting money from investors, so make sure you do your homework before opening your wallet! [editor: do your own due diligence!]

Or win/lose all your crypto in a bet. We won’t judge.

#5 Sell your hair (seriously lol)

We’re not kidding. Ask Google! I’ll wait. Yup, now that you’re back from your search, let me tell you that the best wigs and hair extensions are made from real hair. Hair is also good for cleaning up oil spills, and erm, gardening. You do need to have long, healthy, unprocessed hair to make real money though. Someone sold their hair on this site for US$4,000…Looks like we’re all in the wrong line of business.

Rapunzel could have made so much money and shaved (pun) time off washing her hair in the mornings…

See, if you get a little creative, you could turn anything into a money-making machine. Start building your multiple streams of income, and look forward to retiring early! Or at least, go on a few new overseas adventures, and maybe have a couple more kids (the government didn’t pay us to say this). We hope that you’ve enjoyed reading and in the process, discover some ideas to help with your finances. Get inspired and go kick some ass, ladies and gentlemen!

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

Ask fML Advisers: What Are Your Opinions on Endowment Plans?

[5 min read]

Usually marketed as a form of “forced savings”, endowment plans are long-term plans designed to help you achieve a certain financial goal over a time period. We have written at length on endowment plans, and what to do if you ever think of selling them. However, while we hear a lot of stories from friends and family about endowment plans, what do financial advisers themselves think?

In this article, we asked three financial advisers of fundMyLife – Melvin from Manulife, Jonathon from Prudential, and Ryan from AXA – on what they think of endowment plans, such as interesting case studies and common misconceptions. Without further ado, here’s what they have to say:

Melvin Liu, Manulife

Melvin Liu's picture
Melvin Liu, Manulife

What is your opinion on endowment plans?

At least half of the people I encountered have the general impression that the returns are guaranteed, that they are safe and likely to hit the projected returns. They forgot that they were told that the projections are not guaranteed, only to remember when I reminded them.

When I look at endowment plans, I study three things:

  1. Guaranteed Cash Values/Projected Yield to Maturity
  2. Liquidity/coupon paying features
  3. Intention and suitability of clients for considering endowments as an option

In general, I noticed that endowment plans have evolved over the past five years and not all endowments are the same since each may differ in features such as premium-paying periods, liquidity options and protection features. The plans nowadays are competitive and the guaranteed amount upon maturity aims to be on par if not higher than total premiums paid.

My personal opinion is that people really need to understand why they are purchasing endowments in the first place. In addition, people generally should not plan to withdraw cash benefits (where applicable) from their endowment plan before maturity, unless its necessary.

What are some interesting stories that you’d like to share with us? 

There were two cases I was involved in.

In the first case, it involved a 21-year old lady who was seeking my advice on an endowment plan she recently purchased which she was having 2nd thoughts about her choice. She was contributing a substantial amount of her monthly income, i.e. $750/month, to a 25-year premium paying endowment plan. She got this particular endowment plan from someone she met at a roadshow. Moreover, she was a Malaysian working in Singapore, and having to sustain her premiums for a good 25 years here might sound challenging due to many potential uncertainties, to which she agreed. After consideration, she deliberated between keeping it for another 2 years or so when she could surrender it to take back some cash, or to surrender it straightaway after paying for about 6 months. I showed her objectively the difference in the amount she would lose if she hung on for another 2 years vs surrendering immediately, i.e. $16k+ vs $4.5k respectively, and let her make the call. She eventually managed to resolve it with the agent, and I didn’t probe further on her decision.

In the second case, I was advising a 50-year old lady on her plan to have a regular stream of income in about 2 years time for her retirement. She was surprised that I advised her that she did not need any plans after I reviewed and advised that she was ready to retire with the sum of money she already had. However, she nonetheless was keen to see what options she had to put her in a better financial position while meeting her income needs with a lower risk. We worked out a few options and suggested that she could prepaid an endowment plan in a lump sum so that she can start getting guaranteed cash coupons as retirement income from the second year onwards while maintaining her desired lump sum balance for security and/or legacy.

Endowments are generally more suited for those who wish to take on a lower risk, prefer having a guaranteed cash value component and have a specific time period to save and cash out for their needs.

However, endowments are often promoted also because they are easy to sell and easily positioned as forced savings e.g., for young adults who are starting to work. Like any financial plan, endowments should be recommended as an option only if it meets the client’s needs and not just simply a way to save money.

Jonathon Han, Prudential

Jonathon Han's picture
Jonathon Han, Prudential

What is your opinion on endowment plans?

A major misconception that people have regarding endowment plans is that they think that these plans are lousy. People often compare endowments with investments, which is like comparing apples with oranges – they are different asset classes with different risk categories.

Endowments are good to grow money at a secure rate for timed events, for example an education fund for children or a retirement fund. If you choose to invest in the stock market instead, the time horizon involved, e.g., 20 years, means that you risk a situation where you disappoint your children because the markets are not doing well.

Important point: besides using endowments for retirement and children’s education, it can also be used to build capital towards buying a second property. The advantage of using endowments over investments is that endowments are less susceptible to market fluctuations. On the other hand, property prices and the stock market are correlated; in the event of a market downturn, both stock and property prices fall which defeats the purpose of investing for a second property in the first place.

The second major misconception is that endowments have poor returns. The perceived low rate of returns is due to the financial adviser allocating too much percentage of the premiums to protection instead of investments. Ideally, you should find someone who can advise and allocate the investment-protection proportion correctly. In fact, it is possible that certain endowment plans can beat Singapore Savings Bond and fixed deposits.

Currently, most insurance companies have endowment plans where you can withdraw money after 2 years. However, if you choose to withdraw the money instead of re-investing for further compounding, the returns might be much lower at maturity. As such, I advise clients to take up fixed endowments but pay less premiums for a relatively higher rate of return compared to those cashback endowment plans.

The third misconception is a lot of practitioners introduce the projected 4.75% investment rate you see in the Benefits Illustration as interest, THIS IS NOT ACCURATE. The effective annual interest rate is also something consumers might find it hard to calculate unless they have an access to a financial calculator.

What are your thoughts on picking a good endowment plan?

I believe 80% of people who buy endowments are happy because they serve a good purpose for their needs. Please note that not all endowments are designed to be withdrawal before their maturity. There might be a serious misconception among customer who buy endowment plans from banks that these endowment plans are fully liquid, please bear in mind that endowment plans are never as liquid as compared to your current account.

Secondly, it is important to study the performance of the insurance companies selling the endowment. Endowments are paid of out a participating fund and if it does well, insurance companies have more funds to allocate to policyholders, i.e. 90% surplus to policyholders and 10% to shareholders. As such, it is useful to pick major insurance companies with good track-record of participating funds – you find the information online. Note: past performance is not indicator of future outcomes.

Lastly, decide whether you want the endowment plan to be fixed or flexible. Don’t ask for flexibility unless you need it since it reduces returns in the long term. You should decide also if you need to add on riders for the protection component. However, keep in mind that the cash value of the protection does not increase over time.

Ryan Teo, AXA

Ryan Teo's picture
Ryan Teo, AXA

What is your opinion on endowment plans?

People often have the misconception that the returns are guaranteed. Another misconception that people have is that they mistake returns in the Benefits Illustration with interest rate which are two completely different things.

In general, endowments are pretty standardised. I take into account the length of the policy when it comes to endowments. What I advise people looking into savings plans but have concerns about liquidity, is to invest 1/3 of their funds into the Singapore Savings Bond and the remainder into an endowment plan. This arrangement provides liquidity.

Endowments generally have a trade-off between returns and flexibility. For example, for plans with cashback, the total maturity may be higher but guaranteed sum may be lower than premiums paid.

A thing to take note: inflation should be considered when it comes to endowment plans. At the break-even point, i.e. the point where the surrender value is the same as premiums paid, the duration of the plan also implies that technically the consumer loses a bit of money due to inflation.

fundMyLife Summary

The major misconception that the public have for endowment is that the sum assured is, well, 100% assured. The advisers caution the importance of understanding what you’re in for when it comes to endowments and know exactly why you’re getting what you’re getting.

Melvin shared what he looks for in endowment plans and recounted two interesting client stories – one who benefits from getting an endowment and the other, not so. Jonathon listed three major misconceptions that the consumers have regarding endowments and provides his thoughts on picking a suitable endowment. Finally, Ryan Teo noted the tradeoffs when it comes to flexibility and returns in endowment plans.

If you’ve more questions on endowment or any other insurance plans, head on to our main site and ask our curated pool of financial advisers! Alternatively, if you’d like to connect with either Melvin from Manulife, Jonathon from Prudential, or Ryan from AXA, just click on the link in their names and you can ask them questions directly from their profile pages.

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

Here’s What You Need To Know Before Selling Off Your Endowment Plan

Thinking to sell endowment plan

Endowment buyers typically belong in three different groups. People who:

  1. forgot why they bought it
  2. know why they bought it
  3. didn’t know why they bought it

If you belong to the first group, go dig your storeroom for your policy and recall why you bought the plan in the first place. Go ahead and contact your insurance company to update the benefits illustration and see if it still aligns with your financial goal. On the other hand, if you belong to the second group, well done and we hope you’re on track to achieve your financial target. Lastly, if you belong to this group, you’re most likely confused and frustrated since you are paying regularly for something you weren’t sure of. Typically, members of the last group of consumers would have the strongest reasons to sell since it is a pain on their cash liquidity.

Endowment plans are like marmite

Endowment plans can evoke quite strong feelings of either hatred or love. When used properly at the right time in your life, it is a good way of saving over a period of time to achieve certain financial goals upon maturity. However, when used inappropriately at the wrong time instead, you end up paying the premiums begrudgingly   with seemingly no end in sight.

In our previous article, we mentioned that selling your endowment plan is a viable option if you want to get out of this expensive ride. It’s a decision that can help you make the best out of the worst of situations. For the kiasi and concerned consumers, fret not – it’s perfectly legal.

While it is a relatively fuss-free experience to sell your endowment (based on real-life accounts), you should nonetheless take note of a few things. In this article, fundMyLife shares several things you need to know before you sell your endowment plan.

How long more before your plan hits a (meaningful) milestone

It sounds like a bad question, but can you afford to hang onto the plan? If you’re selling it because you have a sudden expense, debt, or lack of liquidity, it is truly understandable and you should strongly consider selling it. However, if you can afford to hang on to it just a bit more for a couple of years, you might lose relatively less; the percentage gap between premium paid and surrender value closes as it approaches maturity.

In addition, there is a point in your endowment plan called the break-even point. It is a point where the payout value is equal or almost equal to the total premiums paid. By selling your policy at the break-even point, you can immediately exit and not lose too much money, inflation notwithstanding.

Compare quotes and check eligibility

Buyers often look for relatively more profitable endowment plans that have a few years left before maturity. On top of that, there are currently several companies in Singapore which can buy over your plan so it’s good to compare quotes unless you’re in a great hurry for the money. In addition, these companies are looking for good returns after all so if your policy’s returns are too low, you have to brace yourself for rejection.

Furthermore, policies which were paid using CPF or SRS are not eligible. If it was, you’d have more people trying to sell their endowment plan to get CPF money out. Hahaha. No.

Look into insurance protection

Last but not least, after you sell your endowment plan, make sure you have adequate insurance coverage. Chances are, your product might have some protection component built in it. However, now that you’re going to sell it, it’s prudent to check if you need to make up for it in some other ways. You should talk to your financial adviser to discuss your next options. Otherwise, there’s always a handy platform online to ask financial planning questions (hint: it’s us).

Once all that is done, don’t forget to cancel any automatic premium payment if you set up any standing instructions with the banks. That’s all we have for now – all the best.

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

Is Time Really Money? The Real Cost of Excessive Spending

fundMyLife explores the opportunity cost of money

Written by Kartik Goyal, edited by Jackie Tan.  

Opportunity cost! Most of us know it, almost everyone has heard about it – that feeling of wasting money never sinks in completely. It all seems like a wild claim that an excessive spending of just $10 a month is really a $74,000 loss for your retirement fund. In this article, we find a new way to put things into perspective.

Let’s do some (simple) math!

An average person’s lifespan is 82 years in Singapore. On top of that, assume that an average person spends 22 years acquiring his/her education. Additionally, another simple assumption is that a person spends 8 hours a day sleeping, another 8 hours to themselves that do not account for working hours – meals, chores, entertainment, and other activities – and retire by the age of 65. 

After taking everything into account, we are left with just roughly 15 years’ worth of working hours in our entire lives. To put that number in perspective, it’s 5,475 days or 131,400 hours.

At this point, you are probably thinking that that’s a lot of time. Well, the answer is both yes and no. Ideally, the financial aim of an adult is to live at a similar lifestyle after retirement, if not more luxurious which unequivocally depends on your current lifestyle and the one you will adopt in the coming years. This also means you’ll require 17 years’ worth of cash and investments by the time you are 65 to live to the ripe old age of 82.

Let’s maths even more

Deriving from Singapore’s GDP per capita, 3% increment of salary per annum, and a significant promotion and salary bump every 5 years, we estimate that a person will make an average of $51 per hour throughout their career. That’s around $8 million in total (absolute value, not adjusted for inflation or interest). Reading the last sentence would have made you proud of yourself already. You are already tempted into a little celebratory splurge on yourself, with perhaps an ice-cream?

Say a tub of ice-cream tub costs $5 – that’s around 10 minutes of your working life. Now, if you estimate that you buy one such ice-cream every month throughout the course of your working life, the total would be $3,060. If you were to put all that money and its subsequent returns in savings each month, you would accumulate around $19,000 by the time you retire. To put that number in perspective, it’s almost 610 hours of your working life or around 25 days in ice-creams.

To put simply, a single $5 deposit will turn into $53 over 40 years; that’s 62 minutes worth of earnings (assuming 6% interest rate and biannual compound interval). It might not seem like a lot but, if you think about it, spending $5 might cost you 10 minutes but saving $5 dollars will salvage more than 60 minutes of your work time, by the time you retire.

mindblown

There’s more! A $30 dinner with friends each month eats roughly 3,600 hours or 153 days of your time. If you drink alcohol, especially in restaurants and spend $50 a month, you’re pouring away almost 6,000 hours (not including the hangovers). Love those $500 pair of Louboutins? Average price, ladies! Don’t shoot the messenger. That’s walking away from 36 weeks in total, assuming you’ll need a new pair of them every year.  

A graph showing the opportunity cost of buying unnecessary things

To appreciate the impact of purchases, we plotted common activities against two things: average cost of activity, and the number of working hours eaten away throughout your life. For example, if you look at the “Restaurant” example from the previous paragraph, it costs $30/meal and 3600 hours of working life.

We understand that scrimmaging expenses is tough, saving as little as a $100 a month can shave off 1.5 years of extra arduous work towards your retirement fund. By all means spend on yourself to stay motivated, happy and content, however a stitch in time saves nine.

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

Understanding How An Endowment Plan Works In Singapore

This article first appeared on DollarsAndSense.sg

Endowment plans are a common type of insurance marketed and sold by financial advisors. Some of our recent articles have discussed these policies. Previously, we also wrote an article about why Singaporeans can consider using the Singapore Savings Bonds rather putting money in an endowment plan for long-term savings.

Many people we have spoken to varying degrees of understanding about endowment plans. Some consider it a form of investing. Others see it as a savings plan or a hybrid between a saving and insurance plan. And there are those who don’t care what it is, because they have already sworn off these products completely.

Before you think about getting an endowment plan, perhaps it is best to first understand what an endowment plan actually is.

Endowment Plan For Saving

Most financial advisors market endowment plans as a form of savings. The term, “forced savings” is often used in the sales pitch.

When you buy an endowment plan, you can expect to contribute a regular amount to the plan for a designated time period. For example, you may opt to contribute $3,000 a year to a plan for 10 years. Alternatively, there are also single premium plans, where you put in a lump sum amount at the start of the policy.

The length of your contributions may not necessarily be the maturity of your endowment plan. You could be paying your premiums for 10 years and be expected to hold the policy for another 10 years before it matures, giving it a total duration of 20 years.

An endowment plan is frequently used when a policyholder intends to save up money towards some specific financial goals. For example, a 45-year old person who wants to save up for retirement may choose to buy a 20-year plan that matures when the person turns 65.

Endowment Plan As An Investment…

The main difference between an endowment plan and saving money in a bank account is the investment component of the plan.

The insurance company will use the premiums you contribute to invest in range of financial products. The objective of this is to earn higher returns on the money.

A typical endowment plan would usually consist of a guaranteed and a non-guaranteed return. You NEED to take note of this because a financial advisor may skim through the guaranteed portion and focus only on the non-guaranteed portion of the plan.

Guaranteed Return:

The guaranteed portion of the policy is what the insurance company is obliged to return to you, regardless of how badly the investment portfolio has performed.

Typically, if the guaranteed portion is higher, it also translates into the insurance company taking lower risks in their investments. It is also extremely important at this juncture to note that the guaranteed portion of certain policies may be lower than the premiums you have been putting in.

Non-Guaranteed Returns:

The non-guaranteed component of the policy is the additional returns you may receive if the portfolio performs well. The return rates that would be shown in the benefit illustration will be pegged at 3.25% and 4.75% respectively. This is standardised across the industry.

Two things to take note here.

Firstly, these two numbers do not necessarily represent what the insurance company is aiming for or hopes to get. It simply shows how much you will get if the participating fund achieve 3.25% or 4.75%. That’s all.

Secondly, if you do an excel table, you will quickly find that the actual returns shown in your benefit illustration does not tally with the 3.25% or 4.75% returns.

The table below shows the returns you should be getting if you put in $12,053 per year for a period of 5 years, and then hold on to the policy for another 5 years.

Table 1

Table 2 shows the actual return you will get if the fund achieves a 4.75% return in its portfolio.

Table 2

As you can see, the actual returns from this particular policy only gives an actual return of 1.8% per annum back to its policyholder, even though the portfolio gave a return of 4.75%. This is due to the “Effects Of Deduction”.

We won’t go into details of that today. The main thing you need to know is that the portfolio return does not equate to your actual returns, which are usually much lower.

Endowment Plan As Insurance…

Endowment plans may sometimes have an insurance component included. These plans would have a sum assured tag to the policy. This provides a payout in the event of death or permanent disability to the policyholder.

Due to the fact that endowment plans are mainly for the purpose of long-term savings, relying on them to provide coverage would usually be a costly option.

As with all insurance policies, cost of coverage will differ depending on the age, gender and health related issues of a policyholder.

DollarsAndSense.sg is a personal finance website that aim to help Singaporeans make better financial decision.

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

What To Do If You Think Your Endowment Plan Sucks

A woman frowning at her iPad, presumably because she thinks she has a bad endowment plan

Ah, the endowment plan – the bad boy of financial planning. Often, we encounter people who express regret at taking a lengthy endowment plan with perceived low returns, often realized too late after several years of payment. The (rotten) cherry on top? The friend/acquaintance/NS buddy who sold it over an impromptu coffee session many years ago has long left the industry.

If this sounds too familiar and you think you yourself or someone you know got a bad endowment plan on hand, read on first. Here are several things that you can or should do if you think your endowment plan sucks.

Consider why it is a bad endowment plan in the first place

Before we ask why it is a bad endowment plan, it is important to understand what an endowment plan is. An endowment plan is a plan where you contribute regular amounts of money to a time period, or a lump sum at the start of the plan. At the end (provided you survive to the end of the policy term), you’d get a lump sum amount upon policy maturity and hopefully more than what you originally put in. It’s often touted as a plan to force you to save so that you can achieve certain financial goals, e.g., children’s education, retirement, etc.

It’s designed to be very flexible which further adds to the complexity. If you asked 10 people what an endowment plan is, you will get 10 different answers. Some say it’s for savings, others will say it’s for investments, and others think it’s a combination of both with neither’s benefits.

As such, there will be various reasons why you think it’s a bad endowment plan:

  1. You need to pay monthly/yearly and you are constantly racked with the uncertainty of returns upon maturity
  2. There is no liquidity, i.e. your money is stuck in the plan until maturity
  3. You think you can do better, after reading investment blogs and going through self-studying
  4. Turns out you already have insurance coverage and are paying for something that you don’t need in the endowment plan
  5. You are in a bad financial situation and cannot continue with the payment

Evaluate the future reward

To evaluate whether it’s worth continuing the policy, it’s best to look at the actual numbers. Firstly, you can track the performance of the policy via the Annual Bonus Update that the company sends to you (ask your financial adviser for it). It’ll provide details about the performance of the investment. On top of that, you will know if there are any bonuses given to you. Not many people do this, but you can request for an updated benefit illustration to reflect the new estimated non-guaranteed benefits.

Despite the reputation of endowment plans not reaching their projected amount, is the returns that bad upon maturity? According to the fantastic research by Kyith of Investment Moats (shout-out to the great blog by the way, we’re really big fans), the returns at the end of various plans’ tenure ranged between 1.9 to 5%. It might not be a bad idea to hold onto that plan after all.

Speak to your financial adviser

If you’re having doubts, you should check with your financial adviser to explore options you can take. For example, you can use the cashback/coupon to offset the premiums temporarily. You can also ask the adviser for premium holidays, which can buy some time until your cash flow returns to normal without terminating the plan. Bear in mind doing these will affect your policy’s rate of return in the long run. Never ask for a policy loan – it defeats the purpose of going on this plan in the first place and it has quite a high interest rate.

However, if you happen to be one of them who got the raw end of the deal and your financial adviser disappeared (we wrote briefly on this last time), you’ll have to figure out a way to contact the person in charge of your portfolio instead. Go ahead and give HQ a call.

Sell it

Alternatively, you can opt to sell your endowment to free up the cash. In the recent years, some companies like Purvis CapitalREPs Holdings and KashFrov have emerged to take over your endowment plans. It’s almost a win-win situation: those companies own your endowment plans and you get to lose less money than if you had just let your policy lapse.

However, for those with insurance coverage built into their endowment, it is really prudent to check if you have adequate coverage after selling your policy with your financial adviser. Hint: you can ask here too.

Let it lapse, terminate it, or surrender it

Finally, if all else is not an option, there is no choice but to discontinue it. That said, it’s never the best idea to let your plan die or surrender it prematurely. You’ll just have to cut your losses at this point, and hopefully things get better at a later life stage. However, it’s incidences like these that put people off financial planning – these situations are the source of those bad hearsay stories that you hear from friends and family.

That’s all folks (plus a disclaimer)

I hope our article shed some light on the things you should consider if you think you have a bad endowment plan. Don’t get us wrong – we’re not bashing endowment plans at all. Every product serves a purpose, and endowment plans are no different.

While fundMyLife doesn’t believe in bad insurance products, we believe that there is only bad advice (dispensed by advisers of questionable intent). That said, here on fundMyLife we curate our pool of advisers who have strong client testimonials and track record so rest assured you will receive great advice from them.

If you’ve questions on financial planning, head on to our main site and ask away!

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.