Posted on May 17, 2009 - by Eng Tiang Chuan

Endowment Plan with Guaranteed 3.77% IRR

Photo by dutchlad

I did not take note of this plan until an agent friend ask me about it when her client consulted her. She could not believe that such plans exist. Yes, such endowment plans do exist.

Endowment, or for that matter, Participating (Par) or With-Profits plans, have bonuses that will be declared yearly. The bonuses are made up of 2 components, Guaranteed and Non-Guaranteed amounts. As the name suggests, the Guaranteed amount is guaranteed by the insurance company while the Non-Guaranteed amount depends on the performance of the Par fund. Normally, the Guaranteed amount is very low and the Non-guaranteed amount is very high, making the total amount look good. The argument is that if the Guaranteed amount is too high, the insurance company is not able to generate the potential returns from investment which is subjected to volatility. In many cases, the Guaranteed amount is even lower than the total premiums paid, which to me, does not make sense. How can a policy-holder be guaranteed a lower amount than what he put in for a policy that stretches over decades? Have insurance companies fulfilled the Non-Guaranteed projections? My personal experience from reviewing client’s portfolio tells me that the answer is NO! Having said that, it is also highly unlikely that nothing from the Non-Guaranteed portion will be given. The only problem is how much of it. Read more…

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