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.

Ask fML Advisers: What Are Your Opinions On Critical Illness?

Critical illness insurance can be a lifesaver, since you are paid a lump sum if you are diagnosed with any of the 37 critical illnesses. We have written quite a bit of this topic, but why not hear it from the advisers themselves?

We asked three advisers of fundMyLife (check out their profiles!) – Jennifer from Manulife, Roshan from AIA, and Winifred – on their thoughts regarding critical illness insurance and what they think are common misconceptions. Here’s what they have to say.

Jennifer Neo, Manulife

Jennifer Neo's picture
Jennifer Neo, Manulife

What are your thoughts and perspectives on critical illness insurance?

In the past, I took up two orphan clients – clients without a servicing adviser – referred to me by a friend from a different company. They owned two plans: Living Choice and Universal Care, taken up in 1997. 20 years later, in 2017, the wife was diagnosed with Parkinson’s disease, a long-term degenerative disorder of the central nervous system that mainly affects the motor system. It could reach a stage of paralysis where the legs are stiff frozen, limiting mobility.

At the time of her claim, she was a 53-year old housewife. She was mentally shaken but physically she was still fine. Naturally, one would be worried or scared after knowing what the stages of this sickness are and how it could eventually cause difficulties, such as swallowing and even talking or expressing herself. At this point, when one is physically disabled, he/she would need a caregiver to assist in their daily living.

The couple was very thankful that I helped them in the process of checking the claims status. I could sense their gratitude, expressed in simple terms of gifting me a box of CNY biscuits and angpao as it was during CNY period last year.

For critical illness, you should buy it when you don’t need it, so that when you need it, you will have it. When you are young, you should prepare whenever you can. When you take responsibility for yourself in your younger days, your dependents will be free from the financial responsibility of taking care of your medical bills. Otherwise, they might be the one shouldering the bills on top of supporting themselves.

I would urge young adults to think and look into your critical illness coverage. For example, do you have $50,000 in your bank account? If you don’t, it’s a good time to look into covering yourself with a critical illness plan that can cover you with a lump sum to take care of yourself when the critical illnesses strike.

Two facts to share:

  1. When you buy it at your younger age, you pay lesser! And most likely you would have the good health to buy it. There is a cost of waiting –the older you are, the higher the premiums will be.
  2. And the second cost is there is no guarantee of coverage. A health issue could strike any time leaving you not being eligible for coverage. Waiting just a few years to buy could result in not getting coverage at all. Don’t wait until your health changes because when that happens, the insurance companies might not want to take you on.

Roshan Belani, AIA Financial Advisers

Roshan from AIA
Roshan Belani, AIA

What are your thoughts and perspectives on critical illness insurance?

The wife of a good client of mine was diagnosed with Stage II cancer. The client’s family was quite big, with 4 daughters. Fortunately, they had a hospitalization plan that covered most of the medical fees and an early critical illness plan that provided a lump sum payout. While the wife of the client was a stay-at-home mother, they came to know of an experimental drug that was being used in a clinical trial. Experimental drugs are usually not covered by hospitalization plans.

The cost of the drugs for the entire duration of the treatment was between SGD$150-200,000. The family was willing to fork out the money as the lump sum from the early critical illness plan was able to defray some of the costs – they later found out that this drug was indeed covered by insurance, providing much relief to them and their finances. In this case, the early critical illness payout worked as a peace of mind to engage costly treatment.

One misconception that I’d like to address is that people think that critical illness plans are just for working adults. However, it is not meant to be an income replacement. After all, someone has to bear the costs of medical treatment and aftercare in the household. In the client’s family that I shared above, if the drugs were not covered by MOH, the cost of the treatment would have put a huge dent in their financial plans – retirement plans, investments, and even the education for the four daughters.

Fortunately, the wife is currently receiving treatment and is getting better day after day.

Winifred Tan

Winifred Tan, Great Eastern
Winifred Tan

What are your thoughts and perspectives on critical illness insurance?

Over the years, I have observed that underwriters are quite strict. Even if the applicant is young and has not been diagnosed with any of the 37 critical illnesses, he has a chance of exclusion or extra loading (higher premiums) if there is any prior medical history. A few things that I’d like to share:

  1. Terminal illness coverage refers to a conclusive diagnosis of an illness that is expected to result in death within 12 months
  2. HIV infection is usually excluded, whereas occupationally derived HIV is covered in our hospital plans
  3. Diabetes is NOT considered a critical illness, but diabetic complications are considered
  4. Critical illness (CI) usually covers 37 conditions for later stages unless the policy is a specific early stage policy. Normally, early stage CI covers about 29 illnesses
  5. There may be a maximum amount payable for CI on all policies e.g. $2.5M
  6. Angioplasty & other invasive treatment for coronary artery do not pay out 100% of the sum assured (SA). Usually only 10% of SA
  7. Waiting Period: CI coverage usually needs a waiting period of 90 days from the day of purchase BEFORE any claims can be made (which is why it’s one of the first core components of insurance that people usually get for themselves and loved ones)
  8. Survival Period: A claimant must usually live beyond 7 days, which is also the survival period, for a CI policy to pay out (regardless of early or major stage CI coverage)

In addition, people often confuse critical illness plans with hospitalization insurance! They think it pays out for hospitalization, but it is not. Normally, I’d say that hospitalization insurance as “reimbursement of bills” and CI insurance as a complement to hospital insurance for income replacement! People also think that critical insurance looks “critical”, that is the illnesses are too major/serious to get it at a young age. That’s because they do not know about early CI as well.

fundMyLife Summary

The misconceptions that the public generally have is that critical illness plans are seen as income replacements, which should not be the case. Instead, they advise us to view the plan as a form of illness aftercare, when we need the resources to recover.

Jennifer advocated to start buying a critical illness plan early because firstly it’s cheaper and secondly there’s no telling when the consumer may not be eligible for it. Furthermore, critical illness plans can be seen as a way to reduce financial burden of recovery. Roshan’s story about his client’s wife agrees with that sentiment and he said that there’s always going to be someone in the household to bear the costs of treatment. Winifred shares important facts that one needs to consider when purchasing critical illness insurance, e.g., possibility of exclusion due to family history, survival period, waiting period, etc.

If you’ve more questions on insurance, head on to our main site and ask our curated pool of financial advisers! Alternatively, if you’d like to connect with either Jennifer from Manulife, Roshan from AIA, and Winifred, 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.

Opinion: Investing is gambling, or is it?

RyanCoverPhoto

Written by Ryan Teo, edited by Jackie Tan. The opinion series is dedicated to sharing our advisers’ thoughts and opinion on personal finances. Ryan Teo is a part of fundMyLife, the platform that connects financial planning questions to the right advisers.

“Investing in the stock market is just like gambling.”

Or so the saying goes. And people develop a fear of investing from thinking that way.

It depends on our perception on how we think about it.

The problem is that a lot of people do treat the stock market like a casino, hoping to win the big bucks quickly.

Let me ask you a question

Let’s say a friend who approaches you. He says:

“Eh bro! I’m opening a cafe that’s based on the latest dessert trend from Tokyo. It’s huge in Japan. Guarantee make a lot of money one la. If you interested, you can invest $10,000 in my business.”

What will you do? Are you going to hand over the cash to him just like that? I’m sure you will expect some sort of return of investment and do some research on your own.

So you will probably ask questions such as:

  1. What are your costs/expenses?
  2. What are the type of food will you be serving?
  3. What are the profit margins?
  4. When will the business be projected to break even?
  5. What are your staff costs? And so on.

Now, the question is whether you would do the same when you invest in the stock market.

Why don’t we ask ourselves these same questions when we invest? Do you research on the business fundamentals? Most people don’t. They just take the word of friends or analysts and follow the latest stock tips.

One of the most common misconceptions is that when the share price of a company falls, it means that the business is failing.

For example, if the price of Singtel shares starts to drop every day, it doesn’t mean that a couple of shops is closing down every day.

On the contrary, it offers us the opportunity to invest or to buy a part of the business at a cheaper price. Hopefully, you can be a part of the company’s long-term goal.

Investing isn’t optional

The truth is that many people haven’t made peace with the fact that investing isn’t optional. In life, there are only two main types of income. One is from your work or business; the other is from your investments.

If you only have money from working ONE job or have ONE business, you only have ONE income stream.

When I ask others why they were not investing, the one reason that keeps repeating is fear. With the rising cost of living in Singapore, having only one stream of income is also taking a huge gamble. However, think about it this way – the wealthiest people in the world got rich by building successful businesses.

As such, people can either start a business themselves which carries a lot of risks in itself and maybe capital, or they can be a partners of a business.

Essentially, that’s what the stock market offers us – the opportunity to partially own a business.

Sure you’ve heard the saying before “Don’t put all your eggs in one basket.” So, why then do we stubbornly accept a single source of income?

Isn’t that more of a gamble?

If you have any questions to ask me, I’m happy to answer them over at fundMyLife!

fundMyLife is a platform that aims to empower the average Singaporean 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 Facebook page to get exciting updates and your dose of finance knowledge! Let us know what you want to know about finances or something that you wish your friends knew!