Asked on 14 Nov 2019
What do I need to take into consideration when choosing them?
For fixed deposit, as long as you don't forsee needing the money during the time frame of the FD, you can just commit to the FD with the highest interest. In a worst case scenario, you will still get your capital back should you terminate prematurely.
There are a number of factors you will need to consider before you commit to a savings/endowment however. Key considerations include
Are you setting aside money regularly, or via a lump sum?
What is your budget?
What is your time horizon? (both in terms of maturity period as well as commitment period)
What is your objective for this sum of money?
Is it a time bound objective? (e.g. children's education)
After that, you would want to ensure that you find a savings/endowment plan that best suits you (since no two plans are exactly alike) by comparing across multiple insurers. You can do this by working with an independent financial advisor who distributes multiple products.
It is important to note that for a savings or endowment plan, you will want to ensure that you are able to commit and finish the premiums.
I think for fixed deposits, usually the one with the best rates with a reputable bank is sufficient.
But for endowment policies, they can get a little complex.
Firstly you need to understand how an endowment plan pays. It consists of two bonuses. Reversionary and Terminal.
Reversionary bonuses are paid yearly, and once declared, they are guaranteed, insurer cannot U-Turn and take back. Terminal bonuses are one time payouts upon death, claim, maturity, or surrender.
For endowment plans that mature, there will always be a terminal bonus element. If the policy is relying on terminal bonus on its final year to actually give you the profit from the policy, I wouldn't pick it.
This is why I've much preferred retirement income products as supposed to lumpsum maturity endowments, because most of the payout on the former policies are from RB and accumulated RB instead of Terminal Bonus.
Next consideration is of course projected yield. For policy terms of more than 10 years, I'd only look for those that can give me a 3+% compounded rate of return. For those more than 20 years, 4+%. Insurance products don't go much higher than this, with the highest I've seen recently be about 4.46%.
My final consideration would then be insurers participating fund performance and expense ratio. While they don't determine how much yield you can get, they're indicative of the ability of the insurer to make a spread on your money if they provide you with full bonuses. You want to know the insurer has the ability to pay bonuses and still make money. This part can get quite complicated due to the way par funds are created and sub funds for different products.
Sit with an advisor if this is what you're looking for. Insurance products are rarely off the shelf. You want to make sure you understand the intricacies of choosing a good yielding product and an advisor that understands it well as well.
It all depends on your investment objective, timeframe and goal.
I will generally avoid any savings plan / endowment plans as they usually come attached with high fees. You need to keep a close watch on costs because that portion is guaranteed, while your projected returns are never guaranteed.
In the current market, I will also avoid fixed deposits because I would like to deploy my capital sometime soon (awaiting for a market downturn) and fixed deposits levy an early redemption fee.
Having said that, here are a number of short-term instruments you can consider which at least match, or beat the current fixed deposit rates :)
1. Hurdle Savings Account
There are many articles written about these; but since we are on Seedly, I will recommend reading this: https://blog.seedly.sg/best-savings-accounts-singapore/. Bonus: There is even a savings account calculator which you may use.
2. Non-Hurdle Savings Account
There are a number of non-hurdle, yet decently yielding savings account out there.
The first one I'd definitely recommend is the SCB Jumpstart account. It pays 2% p.a. interest for balances up to $20k. One condition is that you have to be between 18 - 26 years old. https://www.sc.com/sg/save/savings-accounts/jumpstart/
Alternatively, the CIMB FastSaver is another attractive savings account that you may want to explore (1% p.a. for first $50k of deposit)
3. Singapore Savings Bond
If all else fails, the Singapore Savings Bond is always there for you. Latest issuance yields 1.71% p.a. if held over ten years. One good thing about SSB is that there is no early-redemption penalty unlike Fixed Deposits.
4. Money Market Funds
If you have spare funds above all of these, you may also want to explore Money Market Funds. Fundsupermart has a relatively low-cost offering for this:
I think it really depends on what your financial goals are, and whether you are okay with taking certain forms of risk as endowment plans do have certain risks and the bonuses that come with it are non-guaranteed in nature. Also, will you be able to fund the premiums throughout the whole term?
Also in regards to this cash that you intend to save, how long is the duration you would like the money to be kept and grow?
For Fixed Deposit, the consideration is only a few
(1) Interest rate
(2) Lock up period
(3) Penalty (for early withdrawal etc) if any.
For endowments, the consideration is
(1) Long lock up period
(2) If par funds, reversionary and terminal bonus
(3) The gauranteed vs non-gauranteed
I wouldn't want you to come and sell your endowment plans to me.
It depends on your objectives. Here are some questions to help you:
How much is your capital?
Is your capital lump sum or an amount spread over a time period?
How long will you be able to commit?
What is your risk appetite?
From there, decide how you want to allocate your money. For instance, keep at most 6 months of monthly expenses in your bank account. The rest of it should be saved or invested for mid to long term. As a general rule, save at least 20% to 30% of your annual income.
For fixed deposit, you may put it over various time horizon, e.g. CIMB has promotion @ 1.8% for 12 months tenure.
For short-term Endowment, AIA currently has a non-participating 2 years limited time offer @ 2% per annum.
If you are looking at longer term savings plan (10 years and beyond), decide if you prefer plans with high guaranteed payout, or if you don’t mind to pin hope on non-guaranteed return. Either way, it is important to note the track record of the insurance company’s participating fund. Here is some information about it: https://www.blog.pzl.sg/what-is-a-participating-fund-singapore/
At the end of the day, it is fundamentally important to know your needs. Then, everything else is merely a tool to help you achieve your goals.