Should YOU, as a student, buy endowment plans?

Being in University, I have witnessed time and time again many of my acquaintances having ventured into the insurance sector. Not saying that anything is wrong with that, I mean I salute you for your hustle, but when they start getting pushy, I believe there’s always a line to draw. I believe many of you in your 20s are also facing this current issue, and you’re not too sure what exactly endowment plans are. Are they insurance? Are they financial products? So, the purpose of this opinion is to discuss what exactly are endowment plans and whether you should get them.

What exactly are endowment plans?

To put things simply, endowment plans are financial products sold by various insurance companies that’s meant to help you grow your money. You would put in a certain amount of money, known as premiums, every month over a certain period. At the end of the period, the premiums will “mature”, and you would receive a payout that’s typically more than the total premiums that you have paid. Moreover, some plans even add in some sort of insurance coverage, should anything bad (touch wood) happen to you in that time.

The Cons of endowment plans

So, you might be thinking, this sounds really good. After all, I’m just paying every month, not doing anything, and watch my money grow. What could be bad about it? I would say, there are quite a number of downfalls to it.

Firstly, you would be required to pay the premiums at every time period, typically every month. If some sort of unexpected situation were to come up, and you want to terminate your policy before the term ends, there is no guarantee that you will be able to get back your capital, much less the accumulated interest. Even though there are endowment plans for many different time periods, that range from 2-5 years to even 10-30 years, it would be hard to make future predictions about your own cash flow.

Next, the interest rate on endowment plans is typically on a lower scale. For short-term plans, guaranteed returns usually range from 1%-1.5% per annum. For longer-term plans, the guaranteed returns can range from 1-1.5% per annum, with an additional 2-2.5% unguaranteed return per annum. At the most optimal point, you would be getting around 4% per annum for a long-term plan that you will only see the cash after 10-25 years.

My stand on Endowment Plans

My stand on this issue is that at such a young age, having capital tied up in a non-liquid investment will affect your cash flow negatively. At this age, most of us do not really have much liquid cash, and by having endowment plans, we are limiting the cash flow even further. One thing to remember is when we enter the working world, a portion of our salary is going to be tied up in CPF, and this could be the forced alternative for the endowment plan instead.

Possible Recommendations

Furthermore, we are at the most optimal age to take on the highest amount of risk, and this begs the age-old saying “If not now, then when?” You could potentially look at investing into a S&P 500 ETF, such as $SPY, $VOO or $IVV, which has averaged a return of approximately 10% per annum since its inception in 1928. The returns from the ETF would beat the rates you would earn from endowment plans, and the bonus is that your funds are not tied up, which is a win-win situation for you.

Some Final Thoughts

The last thing to take note: You are still young. At 20 plus years old, you have a lot of runway to accumulate your wealth. Don’t limit your thought process to just what you hear. There's no right or wrong answer when it comes to this, it's all about knowing what exactly your risk appetite is, and your investment horizon. If you think you want something that's 99.99% safe and is able to pay the monthly premiums, and do not mind the lower interest rates (after all it's still higher than the mearge 0.15% that banks give), if that's your cup of tea, then sure, go for it!

Also, don't get pressured! Some insurance agents are known to be pushy, and in those situations (I know it's difficult), make your stand clear. Tell them that you need time to go home and think through it. Go and do your research, and ask yourself before making such a huge commitment.

Good luck, and all the best! If you have any queries, do comment them down below, and I'll let you know my opinion on the issue :)