Government bonds and endowment

Mr. Tan,

What is the difference between investing in a single premium endowment for 10 years and buying a government bond for the same period? Which is better?

REPLY

The net yield in both cases should be quite similar, i.e. around 3.5% per annum.

The endowment provides some life insurance cover (but this is really quite insignificant). A part of the return is not guaranteed, so the actual return may be slightly higher or lower, depending on the future bonuses. If you terminate the policy before maturity, you are likely to suffer a loss.

The government bond gives a guaranteed yield and is risk free. You can sell the government bond at any time, based on its fair market price. There is no penalty. The dividends are paid to you every 6 months (which may or may not be an advantage to some investors).

I prefer government bonds due to its low cost, and its flexibility (i.e. not locked-in).