I am seeing multiple insurance companies releasing endowment plans recently. Interest rates are rising dramatically and it is predicted that the rates will rise by another 0.5 – 0.75% next month during the FOMC meeting. This will be a short one. I just want to do a public service announcement to ask you to reconsider your options before signing an endowment plan.
Disclaimer: All comments on this blog site are an expression of opinion. You are recommended to consult with a licensed, qualified financial advisor before making any financial decisions.
Rising Interest Rates
We can see that interest rates have been increasing quite severely these few months. As interest rates increase, it will affect the investment products that we buy. Especially those that are directly linked to interest rates, like bonds and endowment plans.
If we look at the June 2022 SSB rates, the 2-year average annual yield is 2.16%. This will potentially go up significantly if the interest rates are increased next month. In comparison, if we look at the two endowment plans from Great Eastern and Tiq, both are offering a return of 2.3% for a 2 and 3-year tenure respectively.
Go For SSB Unless You Have Already Maxed It
The yields of the endowment plans are just minutely higher than the current SSB issue, with the next SSB issue having a potentially higher yield. Additionally, we can sell SSB anytime to swap for another SSB/investment product with a higher yield while we are stuck with the endowment plans for multiple years.
What I want to say is that SSB provides higher flexibility. Also, the slightly higher yield of the endowment plans (0.14%) is not worth the lock-up period to me. In addition, SSBs are a safer investment option than endowment plans. I would say that the Singapore Government has a lower default rate than these two insurance companies.
Unless I have already maxed out S$200k worth of SSB, I wouldn’t consider the endowment plans.
Mixing Insurance And Investments
Some agents will say that their endowment plans have an insurance component so it’s an unfair comparison with SSB. But let’s not kid ourselves and the yield is the only important factor to most of us. The insurance component is there because it has to be there. They argue that the insurance portion has a value, which is undeniable. However, if we are buying an endowment plan, most of us are looking at the yield, not at the insurance portion.
Wait For The Next FOMC Meeting
However, if you still want to purchase an endowment plan, what I will do is wait for the FOMC meeting next month. There is a high probability of announcing an interest rate hike which should increase the yields of new products.
If you have already purchased current endowment plans, you could be stuck with a product with potentially lower yield yet lower liquidity.
Who knows, maybe the insurance companies will come up with new products to keep up with the rising interest rates.
In this rising interest rates environment, the current endowment plans are just not worth it. They have slightly higher yields but have a much higher lock-in period than SSBs. If you really want to purchase these endowment plans, wait till the next meeting and then make a decision.
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