I recently received an email from my IFA relating to TM Asia Life bonus policy for 2009. Policyholders who maintain a participating insurance policy such as a whole life or endowment plan with TM Asia Life will be relieved to know that their 2009 bonus will NOT be cut despite a very turbulent year in 2008 and will be sending a letter to all policyholders who own a participating policy soon.
What makes it even more surprising is the statement below.
TM Asia Life can surely be proud of its unmatched record of never having to cut its bonus ever since its maiden bonus declaration to its participating policyholders in 1951.This is a very bold claim. I have no way of justifying it since I only purchased a policy from them last year but still, there must be some truth in it to be able to publish such a statement. I hope the same could be said of my current insurer. In my last article on The dawn of a new year… I mentioned that I was contemplating on terminating my 20 year Endowment policy (year 2009 will be the 16th year) and I will like to ask readers here to vote. I will not necessarily make my decision based on the votes here but it will be a good opportunity to share and hear from you. Policy Details Plan Name: 20 Year Endowment Coverage: S$10,000 Policy Date: 01 Apr 1994 Maturity Date: 01 April 2014 Annual Premium: $550.80 [caption id="attachment_1494" align="aligncenter" width="267" caption="Endowment Plan returns"]Source: From an email article that I received
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I paid a higher premium initially because of some riders which I duly canceled when constructing my insurance portfolio. Looking at the table above, if I were to terminate my policy this year, I will incur a lost of nearly $900 or a loss of nearly 10%. That's not so bad if I were to divide it with 15 years, I have a negative returns of less than a percent annually.
I dug up my 2008 annual statement and calculated my returns based on their their highest and lowest projected value at maturity date - $14,832 and $13,866 respectively. The returns doesn't look fantastic either. 21.89%gain for 20 years based on the highest projected value transmutes to a little more than 1% annual returns!
The crux of it lies in the final few years where the returns increase substantially. I calculated my returns for the next 5 years only based on the highest projected value and my returns is a whopping 128.39% or 25.68% per year for 5yrs! I know that this is not because my investment suddenly become a 10 bagger but rather my bonus for holding my policy till maturity.
Hence my dilemma (I used the highest projected value for calculation):
- Carry on with the policy and hope that the I will attain the highest projected value. or
- Surrender the policy at a lost of of $873 and a potential returns of 21.89% in 5 years and invest in a instrument that can generate 11% (be it capital or dividend gain) annually for the next 5 years.
Trust us for life
Hi Derek,
The comparison of the 5-year returns is meaningless as it doesn’t take into account the current cash value.
It is actually quite simple to decide whether to hold or surrender.
The correct way is to re-work the IRR using the cash flow
T: -current surrender value
T+1: -550.80
T+2: -550.80
….
Maturity Date: Projected value at maturity
If you can beat the IRR, go for it. :)
Hi Lion Investor,
I don’t quite understand what you mean. How do I calculate the IRR?
In my annual statement, it is stated that my Current Projected Investment Rate of Return (PIRR) is 4.7% and projected yield at maturity date is 2.45%. So I will just look at beating the current PIRR of 4.7%?
Use the XIRR or IRR function inside excel.
Include the current cash value as the 1st cash flow.
Not the PIRR. Compare the IRR of the cash flows with the IRR you can achieve should you withdraw the money.
Hmm, I guess you must understand why you bought an endowment in the first place. I guess it’s not for the insurance coverage because it’s not too significant. Then for savings?
If it’s for savings, I’ll say it depends on what kind of saver you are. Some people need a disciplined saving plan so that they can commit a sum of money aside for future purposes. Some can put aside on their own.
Then it comes to how much returns you can get from your own investing? Well, a 0.7% pa might beat a negative returns anytime! hoho :)
the only way you will know if u stick long enough to find out.
its like tradable endowments that people invest in the UK for 5-6% returns. you will only feel it at the last 5 years.
For this plan that does not even breakeven after 15 years, it don’t seems to be a good plan to me.
Noted that your premium seems to be different from 2007 onwards. Did you remove some Riders then? If yes, then your rate of returns should not include these riders.
Anyway, my opinion.
* If you do not have enough money for some purpose and need to take a loan, then I rather that you surrender it than to take a bank loan which can be 4-5%p.a
* If you do not need the money and want to invest for higher returns over the period of 3-5 yrs, I think its also okay to surrender the whole proceed and invest it. Your chance of getting a higher returns is very high.
But
* If you don’t really need the money and you are have no intention to grow this money for the next 5 years, I rather that you keep this in the Endowment Plan.
Its all your choice…
Hi everyone,
Thanks for your valuable input and advice.
Lion Investor,
I learnt something new from you – IRR. I calculated that my IRR for the next 5 yrs is between 1.42% – 5.25% based on the lowest and highest projected value at maturity.
LP,
This policy was bought by my parents as a form of savings for me. I already have my own form of savings every month and I guess they won’t mind if I surrender it because I’m going to use the bulk of it for my marriage.
Drizzt,
After calculating the IRR, it further reinforce my decision to terminate this policy. I’ll be way better off buying a high yield stock or just the index itself.
Adrian,
You are right. I should remove the riders. The rate of return after 15yrs should be 0.23%. If held till maturity, the average rate of return will be between 1.29%-1.73% base on the lowest and highest projected value at maturity. Still not a lot but at least I’m comforted that my policy has broke even.
I have plans to use a substantial part of the monies for marriage and invest the rest.
Cheers!
About the high yield stocks alternative, i think we need to look deeper into that. Recent market actions have made me skeptical about high yielders. Buy the index would be a good option. STI ETF now yields near 5-6%.
Drizzt,
I concur. The yield may be exceptionally high but this may be due to depressed stock prices. I will be looking at company that give out a constant stream of dividends even in bad times. Hence, I’m looking particularly at the 97 financial crisis and the recession of 85-87.
Cheers!
Hi derek, stumble on this site by chance and will like to share my view
To calculate the yield of your plan, you need the yearly premium, maturity value and years
Yearly premium means the amount going into the par fund, excluding any other riders fees ( except TPD)
Maturity value – you can request for an revised Benefit Illustration of your life office. The MV should be close
Using a financial calculator, you can work out the I, based on the input of -PMT, and FV (maturity value)
Unlike usual investment, you’re contributing yearly instead of a lump sum upfront. Calculation is different.
A 20 years endowment will give a yield of 3.5% compounded. It’s about there.
( Premium for riders are for protection only and not contributing to the par fund)
Yearly premium 550 for the next 5 years is not a big amount, It’ll be good to just maintain till maturity.
Can use your other spare cash, if any, for your investment.
Hi Mike,
Thanks for dropping by. I have decided to terminate my policy. $550 per year is not a big sum but still I will rather put the amount to better use. Also, I have more or less broken even.
Given the current situation now, I won’t be surprised that AIA will be reducing our bonuses, hence even 3.5% compounded till maturity might be hard to achieve.
Cheers!