rising rates think twice before buying an endowment plan

Rising Rates – Think Twice Before Buying An Endowment Plan

I am seeing multiple insurance companies releasing short-term 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 a short-term endowment plan.

Edited 1/12/2022: Included “short-term” as it might not be clear. I am not referring to any long-term endowment plans.

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.

TL, DR

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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6 thoughts on “Rising Rates – Think Twice Before Buying An Endowment Plan”

  1. The insurance companies themselves are using your short-term endowment money to buy SSB-like bonds LOL.

    Almost all endowments now don’t really have much insurance component — basically a return of premiums paid + accumulated bonuses in the event you up lorry or TPD. And they do this by opaquely packaging a term plan on your life in the background, payable from your endowment premiums of course. So it’s not you insuring your life — it’s the insurance company insuring your life.

    If you really want insurance with your endowment, they do it by offering riders now. And that will drastically lower the endowment returns to way below SSBs.

    For those who still don’t know, buying wholelife or endowment is buying a 70% bonds, 20% equities, 10% property portfolio. That’s the insurance companies’ investments.

      1. Hi Consume Less Life, its not a good idea to share such strong opinions if you don’t have sufficient expertise or full knowledge on such assets.

        However, thanks for bringing up the general opinion from a consumer’s pov. When it comes to accumulation and preservation through safer assets like the various savings solutions, there are more important things than yield (interest rates) alone. Here are things about endowment plans that most people are not aware of.

        1) Endowment plans with insurance coverage are a thing of the past. The current plans have already minimized the protection portion to the point where the costs are marginal and allows higher yields.

        2) Endowment plans are long-term assets spanning multiple decades. Plans that run beyond 100 years has an average annualised yield of at least 3.5%PA. Before you go into the argument about SSB having higher yields and shorter holding period, it is much harder to sustain an almost guaranteed 3.5% PA over a longer duration which reduces reinvestment risks. Just like how stocks making more than 50% in 1yr usually has an average 10-yr annualize yield of only 10%. So we need to consider annualized yield over X duration instead of comparing just yield alone.

        3) Yield is only 1 part of the equation. To get attractive real returns, the size of the capital matters more. Endowment plan allows an individual to accumulate large sums of money in the same plan across a long time frame (20yrs) in which every dollar accumulated earns the 3.5%PA. It’s like being able to buy a $250k bond on instalments. SSB does not facilitate accumulation as it only accepts lump sum contribution. Besides, when interest rates are high, SSB allotment averages only about $10k. Capital X Return will only net you a final amount less than $15k. Whereas an endowment allows you to accumulate even up to millions, compounding at ~3.5% PA for more than 50yrs (only hold for 20yrs for more than 50yrs of compounding). In the end it’s not about the yield but how much utility you can get.

        4) Other than simply being a savings product, an endowment also facilitates wealth distribution after death. The money will immediately go to your nominated beneficiaries instead of going through the process of probate.

        These are just some things that most people do not know about endowment, of cos there are more but this is alr a pretty long read. Just wanted to say that there are more important things than returns/yield when it comes to deciding which assets to go for.

        *This is not financial advice but my own personal opinion.

        1. Hi Ben,

          Thank you for your comment. I guess I wasn’t clear in my original article but I was referring to those short term (2-3 year) endowment plans by GE and Tiq which offered 2.3% pa in mid 2022. Looking back, I should have made it clearer but if you look at the context of the entire article, it should be quite clear.
          Looking at similar products now (they updated the link which I had attached previously), they are now 3.38% and 3.6% respectively. These short term endowment plans have fixed returns unlike the long-term ones that you mention that will vary based on investment returns.

          I do not know what are the underlying assets behind these short term endowment plans so I did not want to speculate. The comment above me says that insurance companies are buying similar products as the SSBs and what the insurance companies are investing in which I said I don’t have the expertise to comment on what he said as I don’t have access to the insides on these insurance companies. I still stand behind what I wrote in the article.
          If you have any insights on what is backing these fixed short-term endowment plans, do share. I am quite interested to know. Previously, one of the insurance companies released some green investment products and I wanted to ask for more specifics regarding what is the actual investments behind these products but they did not give me a reply.
          I would say buyers of 2-3 year long endowment plans would only care about yield. Any other benefits like wealth distribution might be a bonus but for such a short-term endowment, it seems like an outlier more than the common case.

          The takeaway of this article written mid 2022 is that it was likely that the interest rates are rising by quite abit by the end of the year and my opinion is that we shouldn’t lock ourselves up with these 2-3 year endowment plans. Even if we would like to buy any fixed short-term endowment plan, it might be prudent to wait as the rates are predicted to rise by the end of the year. Looking at how the interest rates now, I would say my post posted 5 months ago didn’t age like milk. I did have a specific paragraph to ask my readers who still would like to purchase an endowment plan to wait for the next FOMC meeting before making a decision as there might be endowment with higher rates released, which did happen. I am not trying to ask people not to buy all kinds of endowments but to think twice before committing.

          Also regarding the insurance portion, this is the explanation I hear some agents give when comparing these short term endowment plans with products with similar yields like SSBs.

          You make great points about the benefits of the long-term endowment plans and the point about quantum, which is very relevant today when both Tbills and SSBs have been extremely oversubscribed and I have learned something today. Thanks!

          Edited with elaboration

          1. Thanks for taking my points into consideration. As for the short-term endowment plans, my sentiments are the same as yours. Insurers ultimately still wants to participate in the competition and release such products to be an option for prospects that are looking at short-term returns. Additionally, it can be created to aid bank RMs in insurance sales as they are heavily focused on short-term solutions.

            As mentioned in my previous comment, endowment has its attractiveness for serving long-term needs and the insurers that advocate it will strategise accordingly to deliver long-term returns. As such, most insurers don’t actively launch short-term endowment plans. Even if they do, it’s just a novelty and most probably not their focus.

            Ultimately, any short-term assets should be funded by short-term monies (more from a capital preservation approach). At the current moment, the only reason someone might do a short-term endowment over the other assets is the higher allowable quantum that can be put into the plan.

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