Strange Endowment Plans
Endowment plans are a common sight in many people’s insurance portfolio. A common way to mis-sell is to preach the benefit of having returns if nothing happens at the end of a term. So many people end up getting endowment plans when Term plans might have been the much better choice. Endowment plans are basically saving plans and are not meant to be used as a protection vehicle. Whole life and Term plans are.
Among the endowment plans in the market are many plans which, in my opinion, are designed in a strange way. Lets look at a example of a popular anticipated endowment plan. Anticipated endowment are endowment policies that offers a choice of having a cash back yearly or in every 2 years.
For a lady age 27, non-smoker. For a 25 year plan with a sum assured of $40,000, assuming the cash backs are accumulated (ie, no withdrawing of cash back), the premiums and benefits are as follows:
- Annual Premium $3,108. Total Premium paid: $77,710
- Guaranteed Maturity Benefit = $48,000
- Non-Guaranteed Benefit = $70,476
- Total Maturity Benefit = $118,476
The guaranteed Maturity Benefit is lower than the premiums paid! To me, this is absurd! How can you get be guaranteed a lower amount than what you have put in?! Do you know what kind of ‘explanation’ I got from a adviser for such a high non-guaranteed amount?
Oh, we will not be able to give you a higher bonus if we give a higher guaranteed amount.
What a brilliant answer. From the history of insurers cutting bonuses, let’s be contented if there were to meet their projections.
Lets look at another endowment plan which I feel gives much better value. As an endowment plan is not meant for protection, this plan just refund the premium paid for the first 5 years and gives an additional 30% of the sum assured after the 5th year. For a 25 year plan,
- Annual Premium $1,892.90 (payable for 20 years). Total premium paid $37,858
- Guaranteed Maturity Benefit = $65,000
- Non-Guaranteed Maturity Benefit = $14,121
- Total Maturity Benefit = $79,121
Alternatively, if a higher protection is wanted, a $80,000 coverage for Death, TPD or CI can be purchased at $236.55 per year (minimum premium required for this insurer). This together with the endowment plan, would require a total premium of just $43,771.75.
The 2nd combination gives many benefits:
- Much higher coverage at lower premium with a much higher guaranteed maturity value. If the difference in the premiums saved is added to the projected returns, the 1st endowment plan would just give a higher NON-guaranteed value of $5416.75. Nothing to shout about. We are not even sure if the insurer can meet the projections.
- Diversify over 2 different insurers. Think AIG.
- If CI were to occur, the endowment plan can still be paid for using the Term plan payout and the life assured can still benefit from the savings plan. Compared to the 1st endowment, paying for the endowment plan might become a burden. If premium waiver riders are added, then the 2nd combination would provide a extra payout of $80,000 compared to nothing for the 1st plan.
- The Policy-holder’s Protection Fund (PPF) only protects the Guaranteed Sum Assured and Guaranteed Cash Values. A lower cost plan with higher guaranteed cash values are definitely better in this case.
There are many ways a capable IFA can structure protection and/or investments due to the huge number of options available. Even structuring a simple endowment plan gives so much more value compared to those ’strange’ but popular plans out there.
Make sure you are getting value for your policies.
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Tags: PPF
