Endowment plan- SavvySaver

Before I start, for the benefit of readers who doesn't really understand with some of the terms used in an insurance policy (which I am also confused about when I heard about it for the 1st time), I shall explain it as following in my own words:

Premium paid - The amount of money you have paid for the insurance policy.
Guaranteed Maturity - The amount of money which is guaranteed return to you after the policy reach the end of its term (matures), unless the insurance companies go burst.
Non-guaranteed Maturity - The amount of money which is not a MUST to be returned to you after the policy matures. The return may depends on factors like market condition.  

So I was introduced to an endowment plan called SavvySaver which was told by the financial planner, will generate a return of 3.25% to 4.75% per annum. I have not much knowledge about endowment plan and just by listening to this, I thought it was not a bad plan considering that the current interest rate in the bank is less than 1% per annum. However, as my cash is deposited in OCBC 360 current account which gives a maximum interest rate return of 3.05% per annum if you fulfil all 3 of its conditions every month (which I always did), the endowment plan must generate a return of at least 3.05% before I will consider it.

On further investigation, I realised that the return is actually much lower. The image below is taken directly from the insurance company's website explaining to us how the plan actually works.

As I have said before that I don't have much knowledge about endowment plan, please pardon me if I have calculated wrongly and would appreciate readers could point out my mistakes so that I can learn from it. We will only discuss the top portion of the scenario given in the image where there is full accumulation of premiums paid with no withdrawals at any point of time. This is because if there is with withdrawals, the return will be even lower.

The Total Projected Maturity of $100,278 is based on the following scenario:


Monthly premiums paid: $300

Duration: 21 years

Non-guaranteed bonus of $39,173: base on projected investment return of 4.75% per annum on the participating fund that the insurance company invest in. (This means that if the insurance company use your money to invest and the return is less than 4.75%, your non-guaranteed bonus and accumulated interest will be lesser)



So lets start with the calculation:

Every month you will be paying $300 for 21 years. So the total premium you have paid after 21 years is calculated as: $300 x 12months x 21years = $75,600

Ok now look at the image above. Have you notice something? Under the total projected maturity, the guaranteed maturity is only $61,105. You have saved up $75,600 for 21 years but in the end, they only guaranteed you a return of $61,105? This means that you are not even guaranteed the capital amount of $75,600 that you have put in. So what happen with the difference of $14,495 ($75,600-$61,105) that you have put in? After further investigation, I realised that this policy also comes with a basic life insurance plan. Most probably, the difference is paid for the basic life insurance plan (low coverage), administrative fees and agent commission.  

Now lets calculate the effective return per annum, taking into consideration all the cost involved. The Total Projected Maturity is $100,278 after 21years based on the scenario mentioned above. So after 21 years, you have actually gained $24,678 ($100,278 - $75,600). Now we shall calculate the percentage return per year. This is calculated by:

($24,678/ $75,600) / 21years = 1.56% per annum

The return per annum is a measly 1.56%. This is lower than my expected return of 3.05%. This is not even higher than the average annual inflation rate. This is also definitely not the same as what was expected of a return of 3.25% to 4.75% per annum. Furthermore, the return of 1.56% depends on the insurance company being able to generate a return of 4.75% annum. You bear the risk of having even lower return if the insurance company couldn't generate a return of at least 4.75% per annum.

Cheers~    

About the Author

It has been one and a half year since I last blogged. Was busy with my life, especially my study life. I have just completed my ACCA exams and am currently waiting for my results due to be out in August. Hopefully my effort will pay off.

It was tough studying ACCA. It was even tougher to manage a work-study-life balance. You know, having to go home everyday after work with a tired body but still have to think about preparing for your exams. When working, having difficulty to concentrate on your work cause you want to spend time to study for your exams. But glad that I'm able to pull through with the help and understanding of my colleagues.

I am so glad for fate to allow me to have a chance of taking up ACCA. It was something that gave me an aim in life. Allowing me to know what I really want to do in my life. For this, I have to thank 2 very important and respected person whom I met in my life.

I was then 21 years old, still serving my national service. I have obtained a Diploma in Electronics. But then i'm not very interested in it because my O levels results wasn't good enough for me to choose the course that I want to study. At that time I am thinking seriously of what I want to do in life? Even though I studied engineering, I don't want to go into engineering field because i'm have no interest in it. I like investing and I guess that was something that I picked up due to my interest in reading newspaper. I started reading newspaper when I was 14 years old and I got to absorb on some financial news. I realised that the only way to be financially free was to be financially literate, learning the art of investing to allow my money to grow at a faster rate. So I went to research on the degree course that I can study and finally decided on getting a degree in Economics and Finance. As my national service is only during the normal office hours (8am to 5pm), I decided to take the part-time course.

Next comes the consideration of the cost involve in obtaining the degree. It cost almost $40,000 in total. As a person who is still serving his nation, it is not enough to pay off the fees even if I save every single cents of my allowance every month. So I discussed it with my parents and my dad decided to borrow from his company to fund my studies. The directors of the company requested for a meet up with me to discuss about the loan. Then they advise that I should take up ACCA instead and they are happy to fund my studies fully with no string attached. That's how I ended up taking ACCA and I am really grateful for that. Well it cost much less for ACCA qualification compared with the degree, which I think is value for money.

I have so much interest in what I am studying. I studied Financial Management and learned how to value a company and interpret financial statements. I studied Performance Management and learned about managing cost in business. I studied Taxation and learned about the tax system in Singapore. I studied Financial Reporting and learned how to prepare financial statements. I studied Audit and Assurance and learned how the figures in financial statements are derived. All this are critical understanding for me as an investor. I have fun learning all these modules except that I hate the exams. It gives you so much anxiety, knowing that the worldwide passing rate is usually less than 50%, sometimes only 30%. How great is it if I can just study without taking the exams. However, due to the difficulty of the course, it makes you appreciate the qualification even more.

So now since i'm much more financial literate and have much more time, I will start to focus on my investment, applying what I have studied in my stock picking. So which company should I analyse first? I have some company which I am currently interested in like Capitaland, Old Chang Kee, ComfortDelGro etc. Will blog about it once i'm done with my research!

Just an update on my current holding. I am currently holding on to more cash than stocks. The recent stock markets have been breaking new high and thus I think the margin of safety is low. I will wait for a better time to enter the market. And waiting is also considered a strategy.

As written in my previous post, i have bought Apple shares one and a half year ago. Today I am still holding on to it and it has helped me generate a return of almost 50%! I will continue to hold on to it unless there is a severe change in market condition.

Cheers~