Asked by Anonymous
I bought an endowment policy in Aug 2014. It matures 25 years later, in 2039. I am paying $100 a month for this policy. I am currently about 5-6 years into the plan, and if I cancel the plan I would lose about $5k. Is it advisable for me to cancel it and put the money elsewhere better instead of having it locked in the policy for 25 years?
Why do you want to cancel your plan? Is it due to cashflow issues or there is an urgent need for money and that you cannot find any other alternative?
If that is the case, it does not matter what the return is because you need the money now.
However if you are cancelling it because you can get better returns elsewhere, then it is important to do your sum and take into account the time value of money and opportunity cost. (As Mr Hariz has mentioned above)
It is also good to have an endowment or a “guaranteed product” instrument in your financial portfolio. It is not always about which give instrument gives the best return in the portfolio. Rather is is always about managing your risks and returns. Strategise it to your needs and goals. 👍🏻
If you require the cashflow and cannot commit to the plan, then it doesn't matter the return now does it.
But if you are fine with the money being locked up because you have an emergency fund set aside and your insurance settled in worse case events, then you can just treat the endowment as a 25 yr non-coupon paying bond.
It probably also generates a higher return than the high interest savings accounts provided by the banks without the additional frills/steps. But I'll need to confirm this if you're able to provide the projected maturity figure. At 4% per annum yield, the product would return you almost 50k from the 30k invested.
To make back your 5k if you cancel today, your portfolio needs to return 55k in 20 years from the same 100/month.
That's now a 8% per annum return you MUST generate to just break even from surrendering the policy. That means you must consistently do better than 8% to profit from the decision.
Doable? Sure, but it doesn't come without it's risk.
If $100 monthly for the next 19 years doesnt affect your life, then keep it. Theres some sort of saving in it afterall. Take it as looooooooong term locked up savings.
Note the word "projection"