Business

Saturday July 18, 2009

Pros and cons of endowments

By FINTAN NG


ARE endowments a good savings plan or are they not? On the surface, it is a forced savings of a sort for those who are not very disciplined at putting funds away for that proverbial rainy day.

In general, endowments are a type of life insurance that pay a lump sum after a specified number of years or if the person who invested in it dies or have a critical illness.

Like any investment, it may not suit everyone. People who have invested in it say its as good a savings plan as any, especially given the very low fixed deposit (FD) rates, which currently stand at 2.5% for a one-year tenure.

However, detractors of this form of savings say that the return on investment is pretty low although there is, in most endowment products in the market, an element of guaranteed return plus something extra depending on how well the company selling the policy does in managing the funds investors give it.

Carol Yip: ‘A person may want to consider just saving regularly on a monthly basis.’

Jaswant Singh, who took out several policies, is one such detractor. “On hindsight, if I knew the returns were so low, I would never have committed myself to it.”

Jaswant pays RM380 a month for one and has another – an education endowment fund – for which his wife is paying RM500 a month.

“I was young when I took the first one, then I believed the projections but I’m also looking forward to it maturing in five years so that I can pay off my housing loan,” he says.

Whitman Independent Advisors Sdn Bhd managing director Yap Ming Hui agrees, saying that while its a forced savings vehicle and provides some insurance coverage, the real return on investment is normally only slightly higher than FD rates.

“It’s not suitable for someone looking for insurance coverage as the premium is higher than whole life and term policies,” he says.

A whole life policy is a life insurance contract that runs for the duration of a policyholder’s life while term life covers only a specific number of years and policyholders’ loved ones will not get a single cent if there are no death claim on the policy when it matures.

Ginger Leong, unlike Singh, is satisfied with her two endowment policies. Both her policies have maturity periods of 10 years. “I’m paying RM600 total for the two policies, I’m looking at it as forced savings,” Leong says.

She says the guaranteed returns, although low at 4% (for one of her policies) is just slightly above the inflation rate, if inflation is assumed at 3.5% per annum.

“It forms part of my savings plan and while it will mature long before I retire (she’ll only be in her mid-30s when both policies mature), I could sure use the money then,” Leong says.

PL Yeow is another that view endowments as part of a savings plan. “Its a back-up plan in case my other regular savings are insufficient for future needs,” she says.

“There is a guaranteed return for endowments which limits inflation pressure on capital invested. While I do not expect the overall returns at the end of 30 years to be spectacular, the capital plus returns should complement my other personal investments,” Yeow says.

On how much a person should invest in endowments, Yap prefers to take the view that a person should find out what is the right amount to cover on what first then identify the most suitable and economical insurance for it.

Abacus For Money chief executive officer Carol Yip says if a person is using endowment for forced savings, that person may want to consider just saving regularly on a monthly basis.

“The regular monthly savings can be invested in other financial products, by doing so, the person can optimise on the savings through investments, that’s better management of money,” she says, adding that insurance should only be considered for protection only. Yip says if a person takes out a policy, its best that the policy is not the only source of funding for a child’s educational expenses for example.

“If the child falls ill and there’s a need to make a claim on the policy, there will be trouble funding the future education needs assuming the endowment is the only source of saving for the education,” she points out.

Furthermore, Yip says if a person took out a policy for saving for retirement, if the policyholder makes a claim before retirement due to critical illness or disability, then the purpose of the policy is not met.

“If a person does not save and invest in other financial products other than insurance policies, that person may run the risk of not having enough funds or passive income to live on,” she says.

  • E-mail this story
  • Print this story