In our journey with money, we would have heard of an saving/endowment plan that insurance companies are offering. While we are also aware that insurance companies do not have the best of reputation. Does the saving plan really give 3% to 5% returns on your policies? Let’s start of with the basics of financial planning.
What is an Endowment Plan?
An endowment policy is a life insurance contract designed to pay a lump sum after a specific term (on its ‘maturity’) or on death. Typical maturities are ten, fifteen or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness (Source: Wiki)
In simple language, it is a plan to help you save for certain number of years (say 20 years). Every year, you promised to save $1200. At the end of 20 years, the plan will mature and you will get your money back with interest. If something happens within the 20 years (like a death or total permanent disability), the insurance company will give your family the amount you intend to save anyway.
The Advantages of an Endowment Plan
The advantages are very simple.
- FORCE YOU TO SAVE for the certain number of years. Many people in the world have a habit of spending what they have in their bank account. Though they know the concept of delay gratification and compounding effect, they would rather buy something now #yolo
- NO TIME TO LEARN HOW TO INVEST. We are all busy with our jobs, our lifestyle and our family. Where got time to learn to invest? Of course we heard of stories of how value investing making 20% a year. But I don’t have time to learn. Maybe I can let someone do it for me #besatisfiedwith2%
- ASSURANCE OF YOUR SAVING AMOUNT. In an event of a unfortunate situation like death, total permanent disability or critical illness, the insurance company will definitely return the family the intended saving amount.
The Interest Very Low?
Like I mentioned, if you don’t learn how to manage and grow your money. Someone else is going to do it for you. Be satisfied with the 2%.
While there are tons of articles out there that you can take a look at on this subject, they look mostly on the CAGR of the policy. Most policies with cashback/coupon payments a lower guaranteed amount compared to those that don’t.
Today, we are only going to focus on where the interest comes from anyway. It is called the PAR FUND.
“How much is my bonus this year?”
What is a Participating Fund?
A ‘participating’ fund is made up of the premiums that policyholders pay for ‘participating’ policies. A ‘participating’ policy participates in allocations made from the participating fund. The share of the profits is paid in the form of ‘bonus’ or ‘dividend’. Bonuses or dividends are not guaranteed as they depend on how the fund’s investments are performing, how many claims are made on the fund, and any expenses incurred.
In simple words, it means that the insurance company will pool all the money from policy holders and invest. They will share part of the profits with policy holders and it is called a bonus or dividends.
So how much is the PAR Fund making?
Every year, insurance company will release a report on their participating fund performance. I have copied the top 3 insurance insurance companies’s link here.
You can see that it was a good year for insurance companies as they were able to have an investment returns of 10.1%. Minus expense ratio, it is still a good amount declared this year. It is above the 3 to 5% as always quoted by insurance consultants.
Is it consistent?
The market is irrational. There is no consistency and because of that, insurance companies decided to smooth the cycle for policyholders. In a good economic situation, the company might not give all the bonus out. They may decide to keep some so that they can always give it in a year where the economy is not doing very well.
For those that want to take investing seriously now, the Value Investing Bootcamp is where you can learn these principles, coupled with the valuation techniques and the fundamental analysis. Attend the preview workshop to find out more and at the same time, pick up Options knowledge so you can use in conjunction with stock investing knowledge to build up your passive income.
Wishing you the best in your journey with money.
Bonus: Hear from a CEO how does participating fund work