Recently, someone asked me whether an Education Endownment policy is worth taking up, as the returns look pretty decent.
Annual premium: S$5,700 payable for 10 years
Sum Assured: S$100,000
Maturity period: 20 years
Maturity sum: S$100,000
(payable of S$40,000, S$30,000, S$30,000 over three consecutive years beginning from 20th year);
I believe there should be some extra bonus (non-guaranteed) although it was not mentioned.
Riders attached: payer waiver of premium benefit.
Using the above figures, I calculated the internal rate of return (IRR) to be 3.46%. This is a decent figure, provided inflation stays around or below 3% for the next 20 years. Note that this is achievable because the premiums are squeezed into a 10-year period, therefore giving the money its time long enough to compound.
As always, there is a better way to achieve the above results through BTITR (Buy Term Invest The Rest), reasons being:-
1) there is a maturity sum to work on;
2) there is a maturity date to work towards.
Using the parameters as above, I used a term insurance to cover all contingencies needed (sum assured of S$100,000 on child's life, payer benefit on parent's life and critical illness etc). After setting aside the money needed for the term insurance, the bulk balance is channeled into a "Drip in Money" investment plan.
This is what could be achieved at different annualized returns:-
a) @ 5% p.a ==> S$108,653
b) @ 6% p.a ==> S$125,732
c) @ 7% p.a ==> S$145,402
d) @ 8% p.a ==> S$168,041
Two things that are better comparing BTITR vs the Education Endownment policy :-
a) Using BTITR: assuming the returns is 7% p.a, the destination amount is S$145,402, 45% more than what is given in the insurance policy.
b) Using BTITR: assuming the returns is 7% p.a, the annual premium payable could have been S$4,042 instead of S$5,700 to achieve S$100,000 at the 20th year. A savings of S$1,658 (29% less) annually, totaling S$16,580.
However, for most people who are not investment savvy enough, the tendency to take the "prescribed" route (i.e products packaged by insurance companies, except pure term insurance without cash values) is fairly high, mainly due to the lack of knowledge and self-confidence, and some are just "bo-chap", i.e do not bother to do a little more homework.
Annual premium: S$5,700 payable for 10 years
Sum Assured: S$100,000
Maturity period: 20 years
Maturity sum: S$100,000
(payable of S$40,000, S$30,000, S$30,000 over three consecutive years beginning from 20th year);
I believe there should be some extra bonus (non-guaranteed) although it was not mentioned.
Riders attached: payer waiver of premium benefit.
Using the above figures, I calculated the internal rate of return (IRR) to be 3.46%. This is a decent figure, provided inflation stays around or below 3% for the next 20 years. Note that this is achievable because the premiums are squeezed into a 10-year period, therefore giving the money its time long enough to compound.
As always, there is a better way to achieve the above results through BTITR (Buy Term Invest The Rest), reasons being:-
1) there is a maturity sum to work on;
2) there is a maturity date to work towards.
Using the parameters as above, I used a term insurance to cover all contingencies needed (sum assured of S$100,000 on child's life, payer benefit on parent's life and critical illness etc). After setting aside the money needed for the term insurance, the bulk balance is channeled into a "Drip in Money" investment plan.
This is what could be achieved at different annualized returns:-
a) @ 5% p.a ==> S$108,653
b) @ 6% p.a ==> S$125,732
c) @ 7% p.a ==> S$145,402
d) @ 8% p.a ==> S$168,041
Two things that are better comparing BTITR vs the Education Endownment policy :-
a) Using BTITR: assuming the returns is 7% p.a, the destination amount is S$145,402, 45% more than what is given in the insurance policy.
b) Using BTITR: assuming the returns is 7% p.a, the annual premium payable could have been S$4,042 instead of S$5,700 to achieve S$100,000 at the 20th year. A savings of S$1,658 (29% less) annually, totaling S$16,580.
However, for most people who are not investment savvy enough, the tendency to take the "prescribed" route (i.e products packaged by insurance companies, except pure term insurance without cash values) is fairly high, mainly due to the lack of knowledge and self-confidence, and some are just "bo-chap", i.e do not bother to do a little more homework.
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