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Is it safe to buy participating endowment policies?
17 Nov 2020 (112 views)

The global stock markets are volatile. While the stocks are doing well, there is a risk of a crash when the stock market reflect the real economy and the high unemployment rate. 

Is it safe to invest in participating endowment policies? Most of these policies provide insurance coverage and project a non-guaranteed return of 2% to 3% over the duration of the policy. It is better than the return on government bonds. 

Mr. Tan Kin Lian explains.

The return from the endowment policies are not guaranteed. A large portion of the return comes from the projected bonuses.

The bonuses on these policies are based on the projected return from the investments in its insurance fund. Currently, the insurance companies have to projected the bonus based on a return of 3.25% and 4.75% earned in its fund. The average is 4%.

After deducting the expenses of running the insurance company, including commission, marketing expenses and the operating expenses, the return to the policyholder is reduced by 1.5% to 2% per annum. 

Typically, if the insurance company can earn 4% on its investments, it can give a return of about 2% to its policyholders after deducting 2% to cover its expenses.

In the past, it was possible for an insurance company to earn 4% on its investments. A certain portion of the fund is invested in equities which yield more than 4%. A large proportion of the fund (typically 70%) is invested in government and corporate bonds that yield less than 4%.

In recent years, the yield on government and corporate bonds have dropped sharply. The average yield is likely to be 1.5% now, and this comes with some credit risk. The return on equities is also reduced due to the inflated stock prices. It is likely to be 5% or less.

The future return on the life insurance fund is likely to fall to say 2.5% instead of 4%. If 2% is deducted to cover the expenses, the return on an endowment policy is likely to drop from the average of 2% that is projected now to 0.5% or thereabouts.

This means that the projected bonus is likely to be reduced significantly from the projected levels. It is likely that the lower projection will not be realized.

An endowment policy will not provide a good return. It is better to buy term insurance to provide protection against premature death and to find other channels to invest the savings.

Tan Kin Lian



 


Is it safe to buy participating endowment policies?
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The global stock markets are volatile. While the stocks are doing well, there is a risk of a crash when the stock market reflect the real economy and the high unemployment rate. 

Is it safe to invest in participating endowment policies? Most of these policies provide insurance coverage and project a non-guaranteed return of 2% to 3% over the duration of the policy. It is better than the return on government bonds. 

Mr. Tan Kin Lian explains.

The return from the endowment policies are not guaranteed. A large portion of the return comes from the projected bonuses.

The bonuses on these policies are based on the projected return from the investments in its insurance fund. Currently, the insurance companies have to projected the bonus based on a return of 3.25% and 4.75% earned in its fund. The average is 4%.

After deducting the expenses of running the insurance company, including commission, marketing expenses and the operating expenses, the return to the policyholder is reduced by 1.5% to 2% per annum. 

Typically, if the insurance company can earn 4% on its investments, it can give a return of about 2% to its policyholders after deducting 2% to cover its expenses.

In the past, it was possible for an insurance company to earn 4% on its investments. A certain portion of the fund is invested in equities which yield more than 4%. A large proportion of the fund (typically 70%) is invested in government and corporate bonds that yield less than 4%.

In recent years, the yield on government and corporate bonds have dropped sharply. The average yield is likely to be 1.5% now, and this comes with some credit risk. The return on equities is also reduced due to the inflated stock prices. It is likely to be 5% or less.

The future return on the life insurance fund is likely to fall to say 2.5% instead of 4%. If 2% is deducted to cover the expenses, the return on an endowment policy is likely to drop from the average of 2% that is projected now to 0.5% or thereabouts.

This means that the projected bonus is likely to be reduced significantly from the projected levels. It is likely that the lower projection will not be realized.

An endowment policy will not provide a good return. It is better to buy term insurance to provide protection against premature death and to find other channels to invest the savings.

Tan Kin Lian