If you invest $5,000 yearly for 20 years and earn 5% per annum, you will get $165,000 on maturity.
If you pay an annual premium of $5,000 into an endowment policy, your gain of $65,000 may be reduced by about 50%. You will get a maturity benefit close to $132,000 giving you a net return of 2.7% per annum.
Where does the remaining $33,000 of the gain goes to? The likely component are:
* marketing and other expenses: $20,000
* cost of insurance: $6,500
* profit to the insurance company: $6,500
* total $33,000
Most insurance companies have high expenses, especially in paying commission to the agent. If you choose a company that have lower expenses, you can save $5,000 to $10,000 and get a higher return.
If you buy term insurance (about 5% of the premium) and invest the remaining 95% in a low cost, diversified fund, you can save on a large part of the $26,500. You have to invest in a low cost fund, so that most of the return will go back to you, and not to the fund manager.
Note: The maturity amount is not guaranteed as it depends on the actual return from the investments over the next 20 years.
You may think the endowment and wholelife plans are safe but in fact they are riskier than investing on your own. Ask the baby boomers and they will tell how they have been played out by the insurance agents who told them the endowment or wholelife cash value will be enough for their retirement. How much short? It is shocking 50% less than projected. So it is safe? Don't be fooled by insurance agents who tell you to invest in these traditional plans. It is only good for the agents . The agents can retire with high commission. Get an adviser to help you and not insurance agents.
ReplyDeleteRead what Mr. Tan shares with you. He knows because he is an actuary and former CEO of NTUUC INCOME. He knows the cost structure of traditional products. You can see distribution cost takes up the most. Why? insurance agents commission. Agents need high commission to sell. By this you also can see whether they are acting in your best interest or their own interest.Why are you still buying from insurance agents.
2.7% returns over 20 yrs is an extreme case of low returns endowment plan.
ReplyDeleteIf the future projection are close, the returns should be in the region of 4%.
Do not misunderstood that you should not pay your agent any commission. If he had advised and serve you well, he deserve a modest commission.
He is a professional with years of education and training. He should be paid also.
In the case of NTUC Income, the marketing expenses are about 30% to 50% lower than the other insurance companies. The payout to shareholders is also much more modest.
ReplyDeleteThis allows NTUC Income to give a return on maturity that is 10% to 15% higher. This can be seen from the figures given in my posting.
Thiese days enodwments, single premium or regular premium, are silly and stpid products to invest in , when you are thinking od retirement funds. Avoid insurance agents who promote these products to to you. They are thi8nking of the high commission than your interest.
ReplyDelete