Most of us have this trusted insurance agent whom we met at a certain stage of our life. They double up as our financial planners who can help us grow our wealth through the different saving/ investment-linked plans offered by their companies.
Despite keeping the leap of faith that these financial planners will have your best interest at heart, I thought it is a good idea to always verify the plan that your agent recommends to you. In this article, I would like to share a personal experience to prove this point.
The Story Begins
My mum had some saving plans from her insurance company maturing and she could free up the capital and interest earned on these policies. I told her that she could consider Singapore Saving Bonds (SSB) as the 10-year average annual return is more than 2.6%.
I told her the other advantages of investing in SSB, such as it is capital and interest guaranteed and she could withdraw in any period she wanted and the payout would come the following month.
Her insurance agent, who has been serving her for decades, told her that the insurance company can offer a better option, a plan which offers a good interest rate, can withdraw anytime, and has insurance coverage as well. Upon signing up, she can also get some supermarket vouchers.
This is what he (insurance agent) said:
So, I am also keen to find out more about this plan that is supposedly better than SSB.
There are 2 types of saving plans offered by the insurance company, but both plans will require her (my mum) to deposit $10,000 annually for the first 5 years, up to a total capital of $50,000. Thereafter, the plans will continue to run their courses until they reach maturity at the 10th year.
The first plan allows her to do an withdrawal amount of $1,729 every year starting from the end of the 2nd year, i.e. from year 2 to year 10, while the second plan allows her to withdraw her money anytime. For context, my mum is 65 years old and a non-smoker.
Deep Dive Into The 2 Saving Plans
Let’s start off with the first plan that has the yearly payout of $1,729, starting from the end of 2nd year.
This is the illustration table for the death compensation aka the insurance component, in the event the policy holder passed away before the policy ends.
For the 1st year, the payout from insurance is $10,321, which is 103.21% of the $10,000 capital invested into this plan. For 2nd year, it is also at 103.21% (20,642 divide by 20,000). By 3rd year, it is at 105.26% and at 4th year, it is at 105.65%. At 5th year, it is 106.1%.
I am taking the numbers from the best case scenario where the investment return of the company is projected at 4.25%. For other projection, the yield is lower.
To cross check against the agent’s claim, the 105% coverage is only true on the 3rd year policy instead of straight from the start (based on the 4.25% project investment return). The other claim on the % of coverage increasing every year is true.
At 10th year, the maturity value is as follow:
After 10 years, the yearly payout accumulated from Year 2 to Year 10 will be $15,561 (1,729 x9).
If we do apple-to-apple comparison with the guaranteed maturity value, it will be $41,243 + $15,561 = $56,804, which is 13.6% gain over 10 years, which average out to 1.36% per annum.
If we take the best case scenario, where projected investment return is at 4.25%, then the total return will be $43,823 + $15,561 = $59,384, which a 18.7% gain over 10 years, which average out to 1.87% per year.
This 10-year average is still lower than what Singapore Savings Bond is offering at 2.6% in June 2022, which July’s bond is at 2.71%.
Second Plan (Withdraw Anytime)
This is the illustration for second plan:
If my mum does not withdraw any money for 10 years, she will get $61,573 based on the best case scenario (projected 4.25% investment return), that translate to a 23.1% return over 10 years, and an average of 2.31% per annum, which is comparable to Singapore Savings Bond at an average of 2.6% per annum.
However, if you were to compare with the guaranteed returns, it is at $50,005, which is barely earning anything over 10 years.
One point that the agent did not mention or conveniently forgot to mention is the surrender value over the years. He mentioned that this plan is as flexible as the Singapore Savings Bonds where you can choose to terminate anytime during the 10 years.
However, if my mum terminates her plan before the 9th year (for the best case scenario), she will not reach breakeven on her capital, which means that not only is she not earning any interest for the number of years (1 to 8 years) she parked her money in this plan , she will still lose a portion of her capital. See green circles above for the breakeven amouns and their corresponding year.
So, I clarified this with the agent:
I feel that as compared to SSB, the good thing about this plan is that you do not need to upfront deposit $50,000 into the plan and you can progressively reach this amount in 5 years. However, that is not the objective of this post.
In this post, I just want to remind everyone to do your due diligence to look through your insurance plan and see if it makes sense to you, instead of outsourcing your responsibility of managing your personal finance to your trusted insurance agent cum financial planner. They may have told you all the great things about the plan and conveniently forgot to mention the caveat/ catch.
In the above example, the agent mentioned about good thing about being able to do yearly withdrawal but did not mention that after doing that, the average interest rate over 10 years is low. He also mentioned about good thing about the second plan of being able to withdraw anytime, but did not mention that by doing so, you are withdrawing at a loss.
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