Savings for retirement

Someone told me that a hawker was sold a 20 year endowment policy with an annual premium of $7,000 as a form of saving for retirement.

Here is my analysis of the product:

* assume that the return on the endowment policy is 3.5% p.a., the maturity benefit is $204,000.

* if the hawker buy a decreasing term assurance and invest the difference in a unit trust to earn a net interest of 6% p.a., the expected maturity benefit (not guaranteed) would be $245,000 (after allowing for the normal charges of the fund). This is 20% higher than the endowment policy.

An endowment policy is rigid and requires the savings to be made for 20 years. If the plan is terminated in the early years, the policyholder may suffer a loss, due to the high marketing charges.

The unit trust is more flexible.

If the policyholder is able to claim tax relief on the insurance premium, then the tax savings will reduce the difference. But, if the policyholder does not pay any tax, then this advantage does not accrue.