Better to invest in a diversified portolio of equity and bonds

A reader wrote to the Business Times.

In 1997, she bought a 23-year endowment policy from a major insurance company, to fund my eventual retirement. The illustration showed a projected maturity benefit of $590,000, ie an investment yield to maturity of almost 6.5 per cent.

In December 2002, she asked the insurance company for an updated illustration, and was surprised to discover that the projected maturity benefit and yield had shrunk to $532,000 and 5.7 per cent, respectively.

Three weeks ago, she asked for a new estimate. This time, she was truly concerned. The projected maturity benefit and yield had shrunk even further to $444,000 and 4.36 per cent.

She asked if an endowment policy is suitable for retirement planning? Is it better to invest in a diversified portfolio of equity and bond funds, as she does not need the life insurance protection (as she is single)?

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Here are my views.

Prior to the Asian crisis in 1997, many life insurance companies made a high projection of their maturity benefit based on their prevailing bonus rates at that time.

Subsequently, the investment yield dropped. Interest rate on bonds dropped to a low level. The return on equity was also lower. The bonus rates were reduced accordingly.

Based on today's investment return, a net return of 4.36% per annum seemed to be reasonable. It is higher than the interest rate earned on bank deposits and bonds.

Note: This case does not belong to NTUC Income. In 1997, the projected yield on our 23 year endowment plan was 5.5% p.a. We act responsibily in projecting our return. Even so, we have to reduce the bonus rate and the projected yield.

For people who wish to get a better return over 10 years or longer, I recommend that they should invest in a large, well-diversified fund with low expense charge. This is likely to give a better return than an endowment policy.

There is investment risk, but the risk is reduced if one invest for a long term, and has the flexibility to withdraw the investments at a good time.

More details can be found in our FAQ:
http://www.income.coop/insurance/flexilink/faq2.asp