Endowment Policy Plan

Today, I like to share with you the disadvantages of buying endowment policy plan from insurance companies and cheaper & better alternative of protecting you fully, yet have the control of investing your money passively to it’s full potential.

I will take this chance to introduce a concept called “Buy Term Invest the Difference”.

This is not widely known or used because it is not profitable for insurance companies. The commission is not attractive enough for the agent as well as the insurance company. This explains why it is not aggressively promoted by most insurance companies.

Main Reason: Commission is not attractive for your insurance agent for term insurance (Because it’s cheap). See their commission chart table below.

Agency Schedule of Commissions

Source from onemilliondiary.blogspot.sg

Buying a Term Policy costs you less compared to paying for an Endowment Plan with similar coverage. With the balance of money saved, you can invest it in the stock market yourself. A Term Policy is not only cheaper compared to other insurance plans; it is also more liquid, which means you can sell it anytime you want, instead of waiting for maturity.

For example, you pay $1,000 a month to an insurance company for an Endowment Policy. Part of the money you pay is to insure yourself; the bigger portion is to be invested under the insurance company’s account. As mentioned earlier, winnings from the investment are tough for you to track.

Rest assured that most of the winnings go back to the insurance company. Buying a Term Policy costs you much less, say $100.

This is because it purely insures you and does not have an investment component that Endowment Policies do. You can then invest the balance of $900 directly into the stock market yourself. Therefore, instead of paying $1,000 for an Endowment Policy, you can get a Term Policy (offering similar coverage) for $100 and invest the balance $900 into stock market, offering much more visibility to you.

The problem is most do not know how and where to invest this money.

Fun Fact: Aviva SAF Term Insurance has the lowest monthly premium yet the highest coverage in Singapore. It ranges from SGD$4.10 to SGD$41 monthly.

You need to be a SAF in-service or NS men, to purchase the term insurance. AND you can buy it for your spouse and children, equal or lower than your premium. This will protect you up to 65 years of age.

If you like to find out more, do click here.

Let’s get back to business…

Endowment Plan Policy Alternative

Quite a handful want to invest the money in the stock market, but they do not know when to enter the market. One option you can consider is the Share Builder Plan (SBP). SBP is an investment cum savings plan offered by Phillip Securities. It is a plan that allows you to buy stocks at a regular basis by using a technique known as “Dollar Cost Average”.

With this technique, using the same amount of money, more shares are purchased when the prices of shares are low and fewer shares are purchased when the prices are high.

By investing a fixed amount of funds consistently every month over a period of time, your average cost of shares purchased will be lower, thus reducing the risk of investing a large amount in a single investment at the wrong time. This technique is good for investors who are not good at timing the market.

Example of Dollar Cost AveragingDollar Cost Averaging Example

For example:

Month 1 – Price is high and you buy fewer shares.
Month 2 – Price drops and you are able to buy more shares with the same amount of money invested.
Month 3 – Price drops further ad you are able to buy even more shares with the same amount of money invested.

This goes on. Look at the Net Gain/Loss at the end of the year in table above.

SBP is most suitable for:

1) Fresh graduates who have just joined the workforce.
2) Those without significant capital or savings.
3) Investors who are interested in long-term investment.

Through “Buy Term Invest the Difference”, with the same amount of money spent (compared to buying an Endowment Policy), you get insured (with similar coverage as a typical Endowment Policy) and at the same time get more returns from investments through SBP in the long run. One more advantage of SBP is that only handling fees are incurred and this is a considerably small sum. There is no brokerage or front-end load when you purchase shares through SBP.

Example of “Buy Term Invest the Difference”

Let me give you a live example so that it is easier for you to understand, relate, and realise the power of this strategy.

This is extracted from an insurance company and let us call it insurance company P.

P company endowment policy
P company endowment policy

The table shows an Endowment Insurance Plan from P. The insured is assumed to be 30 years of age (male/non-smoker). The insurance policy term is 30 years with a yearly premium of $3,617.

For example, if the insured passes away at the age of 40, the premium paid thus far is $36,170. Upon death, the insured is guaranteed $100,000 with a non-guaranteed investment return of $10,684. As such, the total return would be $110,684.

If the insured passes away at the age of 60 or upon maturity of policy, he/she will get back $156,354 in total, after paying a total premium of $108,510. The insured ROI (return on investment) is about 44%.

The table below indicates what the insured will get if he/she chooses to give up the policy. For example, if the insured wishes to give up the policy at the age of 50, he/she will have paid a total premium of $72,340. The insured’s guaranteed and non-guaranteed returns will be $53,957 and $10,092 respectively (assuming 3.25% investment return per year). His/ her total returns will be only $64,049, running a loss!

Surrender Value of P company policy
Surrender Value of P company policy

Now, let’s assume that the insured adopts a “Buy Term Invest the Difference” approach. From the same company P, the sum assured is still $100,000 upon death, with a yearly premium of only $266.

Buying Term Insurance Chart
Buying Term Insurance Chart

Instead of paying $3,617 yearly to company P for an Endowment Policy, you pay only $266 per year for a Term Policy. You can invest the balance of $3,351 in the stock market. From many open literature, the average annual returns (inclusive of dividends) for Straits Times Index (STI) in general is about 9.5%.

If you invest $3,351 yearly in the STI, you could potentially gain $506,004 (round numbers) in returns after 30 years (not forgetting the power of compound interest)

Buy Term and Investing the Difference. Using Compound Interest Effect.
Buy Term and Investing the Difference. Using Compound Interest Effect.

At the end of 30 years, your Term Policy would be rendered useless and you would have lost $7,980 in total. Despite losing $7,980, with your gain of $506,004 from the stock market your ROI after 30 years would be 336%!

Buying endowment vs BTID
Buying Endowment vs BTID

Read more about this in my new book, The Systematic Trader . You can buy it now by clicking here >> The Systematic Trader Book.

Conclusion

It is good to have insurance protecting you, which acts as a safety net for you and your family. Be a responsible person to yourself and your loved ones, buying at least a term insurance.

As for investing the rest of your money, I would recommend that you invest into SBP if you are new to investing your money.

Let me know your thoughts by commenting below, or your can share to your social media friends or even mention this post “Don’t buy Endowment Policy Plan! It Does NOT MAKE SENSE…” in your website/blog.