Asked by Anonymous
Asked on 27 Jun 2019
I'm currently in uni and bought an endowment plan 3 years ago, paying $200 monthly, 1/4 of my monthly allowance. Should I cancel my endowment plan, a loss of $4k since I surrender early and invest in RSS, which promises a higher return rate of 5%? Or to stay safe, POSB SAYE seems plausible as it promises a return of 2% after 2 years, similar to SSB? Based on my insurance plans, there is a non guaranteed portion of 3.75% or 4.75% and I'm not too sure of the performance of insurance companies!
By your description, you are wanting to cancel your plan to put in a projected higher return product. Which will mean, you are able to set aside the amount you are setting aside currently.
In such cases, don’t cancel your endowment. I won’t advise that because there is no guarantee that RSS will give a higher return and as we grow older, we will have different asset in our portfolio that gives different return.
An endowment gives a decent return similar to many other “lower-risk” asset classes such as SSB. (Doesn’t make sense for you to make a loss of 4k and move to SSB, you will end up losing money still)
Lastly, do note that the projected 3.75% and 4.75% are not your yield. They are investment returns.
There is no promise of a higher return on a RSS plan when investing into the capital market. And don't cancel an endowment if you'll be replacing it with a similar risk/return product like the SSB unless you 100% require the liquidity.
You'll eventually invest in endowment policies in the future, as you can treat them as part of your bond allocation in a portfolio.
So if you're planning to replace the $200/mth for RSS, that means you can afford the savings and shouldn't switch because you need to make up a loss of 4k which is not easy.
And only decide to cancel if you can't afford it, and desperately need the money.
Endowment policies are really one of the worst products out there. But face the facts, the loss usually comes from the entire cost of your first year premiums being pure insurance cost, usually for a coverage that is not meaningful, typically a death coverage, ie you get money if you die.
They are heavily sold because insurance agents get a nice commission off your first year premiums.
Key question to ask:
The money lost is sunk cost. You will never recover the cost of the first / two year premiums that is used to pay commissions and service admin cost for the insurance company that's underwrite and administer the death policy. The only other thing to check is whether the returns are decent, which they will prob give as good as SSB, sometimes worse than SSB. The 3+% and 4+% return marks are illustrative guides and do not mean that the investment returns of the insurer are really that high. They often declare bonuses that are less than these %s, even when they do achieve those level of returns so that they can defer the bonuses guaranteed to you. They call it smoothing in case future years are not so good, but there are no guidelines or rules when they should declare the portion due to you. They probably make it a standard practice to only calculate out and pay the cumulated bonus when the policy matures.
If you were in the first few months of policy, it would be a better idea to back out of it and ask for refund. But since you are into your third year, this is rather moot.
Take note and bear in mind in future. Endowment policies are one of the worst things ever, to require an insurance cost equal to the first one-two years premiums.
Do you have a death coverage policy? If you dont then you can hang on to the policy until you have death coverage from a proper policy.
Its not exactly a good situation, as you already went through the two years where the costs are loaded upfront, and your surrender value is a small portion of the premiums paid to date. Technically I dont even know whether they can breakeven, maybe like after 20-25 years.
I cancelled my first and only endowment policy at about 15 mths. I cancelled because I meant for the money to be a form of savings, and eventually decided I would be better off using the $$ for premiums to make minimum sum top-ups, get tax relief and earn 4% in SA.
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For individuals who have entrusted me, the following are some questions that I have consider to assist them to make an informed decision :-
1) What was your needs when you back then, that got you to commit to this policy? Does that need still exist? If yes, does surrendering the policy has an impact on that need?
2) Are you aware of all the options (Policy Loan, Reduced Paid Up, Reduction in Sum Assured, Premium holiday, Redating) that your policy may offer that might be better than surrendering?
3) Are you looking at returns only? Is there any particular reason why "Buyers Regret" sets in? Have you improve your knowledge and wanted to seek a 3rd party opinion instead?
Also, the money is required urgently? If your plan is a cashback plan, you may take that cashback plan and invest it into what you may want. https://www.linkedin.com/pulse/ethan-should-i-surrender-my-policies-ethan-loh-tat-tian/
Since you are in university, i assume you are still young and would have at least 30-40 years ahead of you in terms of your investment horizon. In the grand scheme of things, $4k is peanuts. Cut your loss and move on.
Before emarking on your investment decision, i would advise you to read Ben Graham's The Intelligent Investor and John Bogle's The litte book of common sense investing