Friday, December 8, 2023

My Child’s Education Endowment Policy

When our children were born, we heeded the advice from a colleague on purchasing an education endowment policy for them.

Back in 2003, we had purchased a 20-year policy term. The savings amount was SGD 995.55, with the accompanying riders of SGD 73.78, bringing the total annual premium to SGD 1,069.33. The premium payment would stop at year 17, after which in years 18, 19 and 20, the guaranteed portion (cash survival benefit) of SGD 15,000 would be paid out SGD 6,000, SGD 6,000 and SGD 3,000, respectively, with year 20 saw the additional payout of the non-guaranteed component.


In totality, the amount of premiums paid was SGD 1,069.33 x 17 = SGD 18,178.61, while the total guaranteed and non-guaranteed amount was SGD 26,558.48. This represented a value return of SGD 8,379.87, which in very simplistic annualized return (i.e., taking the paid value and end value for calculation), it would be 1.91%. However, if we only focus the savings portion and treat the riders as costs, the annualized would be 2.28%. Note that we did not reinvest the first two SGD 6,000 back into the policy.


As I had emphasized on the word simplistic, the annualized return would be different as it was not a lump sum payment in the beginning but rather periodic across the policy life. As endowments were better off being seen through in its entirety, hence it was fair to treat the calculations from a lump sum perspective instead.


Was It A Good Deal?


The question of whether the policy was a good deal is dependent on how and when one sees it. Hence, it is one of those “it depends” answer that I love to dispense.


The year was 2003, and as I had shared before, I was in the ignorant zone on investments and stuff, and endowment plans were one of my better-known tools on growing wealth. It was a form of forced savings, which was good, and the returns of the policies were attractive as compared to the usual bank savings account. Looking back, based on statistics from the Monetary Authority of Singapore, annual savings accounts and 12-month fixed deposit accounts were never above 1% between 2003 and 2020, thus from this angle it was a good deal.


Of course, at present we have attractive interest rates and the availability of Singapore Savings Bond (SSB), so the 1.91% or 2.28% looked like a not-so-good deal now. With fixed deposits we could project one year in the future, and with SSB could look 10 years ahead, but for a 20-year plan, what would the returns be like? To be honest and fair, I did not sign up for any endowments recently and thus unable to see what the annualized would be like for comparison.


Speaking of projected returns, from the original benefits illustration of my child’s policy, the annualized return was quite close to the actual (SGD 996 x 17 savings paid and SGD 28,090 guaranteed and non-guaranteed payout) which was 2.27%, so in this viewpoint it was a good deal.


Finally, if we match it with investments on certain equities, returns wise endowments would lose out by a mile (1.91%/2.28% vs. S&P500’s 8% to 10%), but we do need to factor the volatility and risks that comes with them. Depending on the insurance firm and subjected to a limit, endowment policies are covered by the Policy Owner’s Protection (PPF) under the Singapore Deposit Insurance Corporation Limited (SDIC), so there is a safety net of sorts. Risk and returns go hand-in hand.


What To Do With The Payout?


As there was no immediate use of the funds, it would be injected into our Bedokian Portfolio allocated under our child’s contribution. We had deployed some of it to our equities buy (the first SGD 12,000 paid out in the previous two years were vested) and are planning to deposit the remainder into the coming SSB tranche in December 2023 to slightly rebalance our bond component.


And to add, we are servicing one more education plan policy. More of that in a few years’ time.

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