Things you should read before buying an endowment plan

[bibu00]

1. What are endowment plans?
(From wiki)

An endowment policy is a life insurance contract designed to pay a lump sum after a specific term (on its 'maturity') or on death. Typical maturities are ten, fifteen or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness.

Here's a guide to endowments by moneysense.gov.sg.

https://www.google.com.sg/url?sa=t&source=web&rct=j&url=http://www.moneysense.gov.sg/~/media/Moneysense/News%2520and%2520Events/Media%2520Articles/Business%2520Times/Endowment%2520Policy.pdf&q=endowment%20fund%20allocation%20singapore&ved=0ahUKEwiTktvukrrNAhVGNI8KHdVmD5YQFghFMAg&usg=AFQjCNH33lCid3UoJSPDkekNoX-ljtjGwA&sig2=wfb60FVrWByIotvfYoXGvg

2. Case study of an endowment plan.
I have this pruflexicash policy that i bought from prudential. Below screenshot is my benefit illustration. My premium paying is $396/month

Your eyes arent tricking you, the sum assured is way less than premium paid.

There is a chance that at surrender, I will only get back 55k for my 71k premium paid. And that Is a HUGE Risk to bear.

According to the benefit illustration, the value $88136, the maturity surrender value, is of a "projected 5.25% investment return". However, according to the POSB savings calculator, it is only a approx 2.8% interest rate.

Premiums go into a fund and the fund is invested by the company. If the fund performs at 5.25% over the course of your plan, you can expect to receive the values as per the projection, which in your case seems to be 2.8%.

As answered by a prudential agent, 5.25% is what the fund is projected to perform
The customer will only get approx 2.8% returns per annual.

This means "Hey, my money is invested in a fund thats generating 5.25% returns! But im only getting back approx 2.8%. BOOOOOO"

Bear in mind that 5.25% is the upper range of the projection chart. If it does not perform at this rate, i believe the 2.8% returns will scale down too.

So where does the rest of the money go?

Commission, marketing expenses, cost of insurance, people to maintain and service your policy, fund managers, maintaining the guaranteed amounts in your policy and the profits of the company among other things.

So the answer to my question is that i am paying $18,000 (approx), which is 26% of the premium paid at maturity, for the above stated purposes.

This policy covers me for ONLY 40-70k scaling according to the year premium paid.

So congratulations all pruflexicash/endownment policy holders, whatever your argument are, you cant deny the fact that 20%(in most case, more) of your premium paid goes to the company's new BMW 7 series owner.

Noticed an advertisement in the newspaper regarding NTUC policies returning a 5++% yield for their recently maturing policies.

Would like to kindly remind all MM/SSI readers to refer to my OP post and not be mis-led by the the advert. 5++% is what your fund perform, which is great, your money is working hard, insurers is doing a "decent" job picking fund that yields a stable market return for the customers.

BUT, your yield at the end of the policy is going to be WAY WAY WORST than whatever your fund is performing. This 5++% yield from your fund needs to be used for

3. Videos gallery. These will definitely change your financial life!

This is a super good video, google's discussion with 2 great sage of investing. Who they are, i will leave it to you to google their profile.

4. More good resources on endowment policies.
http://dollarsandsense.sg/understandingendowment-plan-in-singapore/
http://www.bigfatpurse.com/2014/06/the-actual-returns-of-endowment-plans/
http://www.bigfatpurse.com/2013/02/is-this-a-good-deal-great-eastern-annual-cashback-endowment-plan/
http://www.straitstimes.com/forum/letters-in-print/marketing-of-endowment-plans-needs-regular-review
http://tankinlian.blogspot.sg/2012/11/buying-endowment-policy.html
http://blog.moneysmart.sg/insurance/ever-wondered-how-insurance-agents-in-singapore-make-money-from-your-policies/

This link has a huge list of reader submitted matured endowment for analysis purpose.
http://investmentmoats.com/budgeting/do-your-insurance-saving-plans-endowment-give-you-3-to-5-returns/

 

[Lewis.T]

Premiums go into a fund and the fund is invested by the company. If the fund performs at 5.25% over the course of your plan, you can expect to receive the values as per the projection, which in your case seems to be 2.8%.

 

[bibu00]

If the fund they used my money to invest in returns at 5.25% but i only get 2.8%, where does the rest of the money go?

 

[Lewis.T]

Commission, marketing expenses, cost of insurance, people to maintain and service your policy, fund managers, maintaining the guaranteed amounts in your policy and the profits of the company among other things.

 

[mcylo]

Hi Lewis,

Wats the diff betw pruflexicash and prucash?

 

[Lewis.T]

Hi Lewis,

Wats the diff betw pruflexicash and prucash?

Hello mcylo, PruCash Max Limited Pay works similarly to PruFlexicash, but the premium term is shorter than the maturity.

PruFlexicash has the same premium term and maturity (example premiums for 15 years, mature after 15 years.)

 

[mcylo]

Thanks for the quick reply.

Hur, premium paying years shorter than the maturity? Thats new to me. I always thought maturity = premium terms. Looks like i gonna read thru the policy again tonite.

Own the policy 10 over years....

 

[Shion]

PruFlexiCash again

The ROI figures on the benefit illustration are just some figures required to be printed and does not represent that the company can perform at such levels.

 

[Perisher]

That's why I say the projected returns is misleading, useless.
It doesn't represent what client will get, in pure profit terms.
Putting those 4.75% or 5.75% blah blah blah means nothing if it is only going to be cut cut cut or worst...

 

[Shion]

That's why I say the projected returns is misleading, useless.
It doesn't represent what client will get, in pure profit terms.
Putting those 4.75% or 5.75% blah blah blah means nothing if it is only going to be cut cut cut or worst...

But the figures are a requirement I only know the figures used to be a higher one

 

[Mecisteus]

That's why I say the projected returns is misleading, useless.
It doesn't represent what client will get, in pure profit terms.
Putting those 4.75% or 5.75% blah blah blah means nothing if it is only going to be cut cut cut or worst...

thats why i emphasis on the importance of guaranteed values.

projections can differ and past performances may not be repeated. because a good fund manager is unlikely to stay in the insurance company for a very long time. unless the company has a winning investment formula that can be repeated in successions.

i remember looking at this TM Asia Life's CollegePlus. if i can recall correctly, the guaranteed returns was higher than 4% for a 20 years period.

http://www.wilfredling.com/content/view/144/9/

It is the best endowment plan for the purpose of saving up for children's education. Having the highest guaranteed return, it is something none of all other insurers can beat.

 

[Mecisteus]

According to the benefit illustration, the value $88136, the maturity surrender value, is of a "projected 5.25% investment return". However, according to the POSB savings calculator, it is only a approx 2.8% interest rate.

Can anyone advise me if there is a miscalculation on my part? Or am i misunderstanding something here?

in short it is like this.

you are paying $396 per month. you need to pay

$A for insurance costs, commissions to pay your agent so that he can buy a new car, etc, etc
$B is left for investments

$A + $B = $396

the 5.25% is the projection on the returns of $B in your policy

2.8% is the actual returns if you consider $396 as a whole

 

[bibu00]

Correct me if im wrong, isnt the above picture the sum i paid for the agent to buy his new car?

6th year i should finish paying for his car alr mah.

 

[Mecisteus]

Correct me if im wrong, isnt the above picture the sum i paid for the agent to buy his new car?

6th year i should finish paying for his car alr mah.

you did not include other costs.

how about the fees to pay fund managers luxury lifestyle? to pay dividends to shareholders?

 

[bibu00]

Aren't those fees included in the distribution fee?

 

[Perisher]

But the figures are a requirement I only know the figures used to be a higher one

IKR...
The figures that should be a requirement should be the actual returns.

Just because the government says those are the required figures to display doesn't make it right, governments do silly things all the time, if it's wrong, change it.

We as small time clients has not much power to change it, the insurance companies are even more reluctant to change it since it gives them the proper right to say a higher figure than actual returns.
Thus the government doesn't feel any pressure to change it.

Vicious cycle.

 

[Mecisteus]

http://tankinlian.blogspot.sg/2010/02/distribution-cost.html

those are costs mainly for commission charges.

it is not possible for the charges to stop at year 5. after year 5, your savings has to be invested by fund managers. you need to pay the fund managers.

 

[bibu00]

@5.25% investments returns, my returns should be as shown.
So you are telling me im contributing $18871 to my agents new satki BMW 7series over 15 years?

Mods, if you want to, you can use my GPGT to start a (Official pruflexicash thread).
I alr gpgt all the values, the $ potential customers will be contributing to the agents new car blablabla.

 

[Perisher]

Mods, if you want to, you can use my GPGT to start a (Official pruflexicash thread).
I alr gpgt all the values, the $ potential customers will be contributing to the agents new car blablabla.

I think there are many pruflexicash thread already. IIRC someone links to plenty last time.

 

[Darkzi0n]

@5.25% investments returns, my returns should be as shown.
So you are telling me im contributing $18871 to my agents new satki BMW 7series over 15 years?

Mods, if you want to, you can use my GPGT to start a (Official pruflexicash thread).
I alr gpgt all the values, the $ potential customers will be contributing to the agents new car blablabla.

returns of underlying fund is not equal to ur returns.

Think of it this way. After taking into the cost of distribution, management fees and other watever fees, u will get an EFFECTIVE return of approx 2.8% IF the fund u invested in generate a 5.2% return.

n no, not all of ur returns are eaten by ur agent. u r throwing money at alot of very rich ppl when u buy such products.