5 Major Misconceptions Singaporeans Have About Endowment Plans
Usually presented like a type of forced savings plans for certain financial goals, endowment may take on several roles whether it is for savings, insurance, or even a mixture of both. Undoubtedly, given its many facets, it is not surprising that there are lots of misconceptions about endowment plans.
Say endowment intends to anyone, and most likely you might begin to see the person shudder. In the end, endowments are generally sold by relationship managers in banks and financial advisers – the plan has gained quite a bit of notoriety. Having said that, we here at fundMyLife believe that each financial product serves a specific purpose.
Earlier on, we asked a number of advisers of fundMyLife regarding their opinion on endowment plans and using their stories we observed there were several consistent misconceptions that customers have regarding these plans. As a result, in the following paragraphs, we highlight these common misconceptions about endowment plan that individuals have.
# 1 Endowment Plans Aren't Liquid
Contrary as to the a (possibly) errant adviser or relationship manager inside a bank might tell you, endowment plans aren't liquid, i.e., you cannot back out among premium payments and you're locked in for the stipulated period of time in the plan. Based on our research, this is a surprisingly common misconception about endowment plans.
While it is a good way to enforce savings for a particular financial goal, the required monthly payments can become a significant supply of stress when you're not able to make payment because of unforeseen circumstances. As such, you should recogne this fact early and consider what is the best place for your money.
#2 Guaranteed Value Doesn't imply You are making More Money
In the advantages Instance of the plan generated for you by your financial adviser, there are many columns that require your attention.
Source: HardwareZone Forums
With mention of table above, there are plenty of numbers, however the most important parts are highlighted within the following table.
Arrows drawn to show the guaranteed death benefit (black) and guaranteed returns (red). Source: HardwareZone Forums
Assuming the program matures in Fifteen years, the guaranteed amount upon maturity is still under the fundamental premiums paid. Thus, it is useful to compare the guaranteed portion of the plan vs the premium paid to determine how much you lose within the worst case scenario. In the ultimate worst case scenario where you can find no non-guaranteed returns whatsoever (quite unlikely), you may lose quite a bit of the main that you simply paid.
Therefore, it is always important to update your Benefit Illustration from time to time so you are aware your endowment plan's on the right track.
P.S. If you haven't noticed, for several Benefit Illustrations, you can see that the column for death benefit will always come first since the value is definitely greater than the premium paid. Your vision will invariably land on the higher value first, before going to the lower value. We don't know if it's intentional, but it is good to train your eye and tear it away to consider the surrender/maturity value.
#3 Projected Returns Don't Equate To Your Actual Returns
This raises the next point about returns. Even if the fund performs in the stipulated level and reaches the projected returns, what you're getting will always be under advertised. That is because when the fund achieves either 3.25% and 4.75% returns on their investment, it is the fund that achieves that returns and never your plan. Therefore, the careful wording: “projected returns of investment”.
#4 Flexibility Might not be The very best Thing
And that brings us to this point on flexibility and returns. In a bid to make endowments more attractive, insurance companies introduced plans with payouts. It's a welcome feature because the payouts may either be reinvested or be used for other things. However, is the flexibility a classic positive thing? Let's possess the math perform the talking. We discovered an excellent table from Talk Money Lah illustrating the main difference within the internal rate of returns between reinvesting cashback and withdrawing the cashback (all of those other article is fairly awesome too).
Source: Talk Money Lah
Upon closer calculation, having payouts at regular intervals give you lower returns once the plan matures. Even with exactly the same amount of principal, the internal rate of returns could be different at the end of the policy term. there is a trade-off between flexibility and returns upon maturity.
In our earlier piece, the financial advisers of fundMyLife opined when liquidity is a problem, you can either do either
- A fixed endowment but at a lower amount of premium, or to
- Split the money into both endowment and something safe like Singapore Savings Bond
#5 Endowments Aren't Worse Than Investments
At the risk of sounding cliched, comparing endowments to investments is equivalent to comparing apples to oranges. Both are separate asset classes with different levels of risk and structure. Furthermore, both of them are employed for different purposes.
One good thing about endowments is the fact that having guaranteed returns means even at the worst of times you would have a sum of money, as opposed to investing where your money may potentially vanish when the stock exchange goes awry.
Furthermore, the timed element of endowment plans also means you are able to plan years ahead, a thing that stocks won't be able to 100% guarantee.
Endowments instil discipline for individuals who might otherwise not save for his or her financial targets. You just need to figure out which plan is the right one for you at your particular life-stage. Much more, guided with a trusted financial adviser.
