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:
- You need to pay monthly/yearly and you are constantly racked with the uncertainty of returns upon maturity
- There is no liquidity, i.e. your money is stuck in the plan until maturity
- You think you can do better, after reading investment blogs and going through self-studying
- Turns out you already have insurance coverage and are paying for something that you don’t need in the endowment plan
- 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.
Alternatively, you can opt to sell your endowment to free up the cash. In the recent years, some companies like Purvis Capital, REPs 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.
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