Sunday, July 3, 2016

Endowment Plans Are Not All Bad

As much as I am against Insurance Savings Plans, I do admit that sometimes I am too harsh and also sweeping to write them all off as shit products. There are times when they do have some use to them.

I just want to be clear that before the Singapore Savings Bonds came out, endowment plans were actually a rather good alternative to people who want to eek out more yield for than cash and have the time, instead of just rolling over fixed deposits annually.

For someone with a 5 year time-frame, finding a place to park that money that will rewarded adequately for that long period of time, but also with some safety is not easy to find.

Structured products can give you higher returns at a longer lock in rate, but there is not always a guarantee on the capital, let alone the returns!

Fixed deposits are safe, but since they are being rolled over every year, they would generally offer lower rates. You're not really capitalizing on the extended time period that you have to work with.

So here comes in endowments / investment savings plans. And there must be a distinction made between good and bad products. This article by SG Money Matters really resonated with me, highlighting the differences between "good" and "bad" endowment plans.

Generally speaking, good endowment products have very similar common characteristics:

  • Guaranteed capital protection
  • Guaranteed returns
  • Relatively shorter durations

The key and most important thing is the limited tranche. It's a good deal because it is limited. If you're getting one of those common, normal, generic plans that you can waltz in and buy anytime, more often than not, it's going to suck. The limited tranche is important, because what it means is that they have found a very good and juicy opportunity, which of course has a limitation in total investment amount. If the tranche is limited, more often than not, it's a good indication that you might be in for a good deal.

Guarantee capital protection would seem like a no-brainer that ought to be offered on all these plans. While many plans do offer this, it should not be taken for granted that your plan is one with guaranteed capital protection.

Guarantee returns is something that has to be very very very well understood. They could offer guaranteed returns, but un-guaranteed capital protection, so you could still overall make a loss. They could also only offer partial guaranteed returns, which would mean that your actual returns might be far less than your "projected" returns.

I do make a concession that if a product is capital guaranteed and there is a small minimum guaranteed returns, it could be a rather decent product that could potentially give you more rewards, if you are willing to accept a less than optimal final outcome.

Finally, most of these investment saving plans usually have a shorter tenure. By my guess, it's usually under 7 years. This means that you don't have to lock in your money for years and years to get a simple and cheap savings tool.

A decent endowment product that I've seen is the China Life SaveReward 101, which is a 5-year, 2.25% endowment plan. While 2.25% might seem like chump change to you, it is guarantee for both capital and returns. Compare that to this month's SSB and you get a 5 year return of just 1.64%.

So is the SSB the superior safe investment for savers? Not necessarily. For risk-adverse people, they must be aware that there are more than just 1 way to earn returns on your cash which isn't rolling over fixed deposits. All you have to do is to keep your eyes and ears peeled for good offers, and then to analyze these offers objectively to see if such a product matches your own investment goals.

Not all endowment plans are bad deals. But you know and I both know it. Most are.

1 comment:

  1. Thank you for sharing such great information. It has help me in finding out more detail about Endowment Plan!


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