Question: Wilfred, I sold a 5 years single premium endowment from a reputable insurer in 2009 to my clients. Recently it just matured and I was shocked to discover that my clients only receive $102,291.77 for every $100,000 single premium. I was told single premium is a safe product but the returns are horrible! Can I complain on behalf of my clients and if yes to whom? - From a financial adviser
Wilfred: After reviewing the benefit illustration, it is indeed a single premium endowment for 5 years. The maturity values given were:
Guaranteed: $100,000
Non-guaranteed ( @ 2.7%): $107,850 (effective return is 1.53%)
Non-guaranteed ( @ 4.2%): $115,950 (effective return is 3.00%)
Since the actual maturity value is above the guaranteed amount, strictly speaking there is nothing wrong with the product and that you have no basis to complain.
Still, the realized return is only 0.45%pa. The 12 months fixed deposit rate from 2009 to 2014 were around 0.3% to 0.6%pa which I copy and paste from MAS website below.
So, what can we learn from this incident?
- It does not mean large and branded companies are good. In fact, no insurer can claim to have all its champion products.
- “No risk” does not mean no loss. After net of inflation, you can still make a lost. Even if the insurer meet its highest projection at 4.2% which is actually effective 3% nominal return, the real return is still negative because of inflation.
- It is better to diversify the clients' investment portfolio. For insurance products, diversified across different insurers because you can never know which one will give a raw deal until it is too late.
Like this article? Subscribe to my newsletter below for more.
Buy only when you need it, or else, forget about Insurance companies.
The only shocking thing I find is that insurance salesman can be shocked / surprised at the pathetic returns.
Very easy to con people in 2009 just after the GFC to put their money into “better than the bank” endowments and wholelife.
Don’t you know that ever since from 1998 (AFC) insurance companies in SG have kept on lowering their bonuses and returns to policyholders?!?
Your analysis is not complete. The client did get insurance coverage & that is something that you need to include.
Single Premium Endowment Product -be it 3Y or 5Y, are not really long to mid term investment vehicles. SPE are sold as “cash products” so don’t think you can get equity like returns. If you refer to SPE in diversifying across insurance firms, it does not make sense. All are competing , and bidding for the same type of assets within that time horizon and similar risk/return profile -don’t expect any to be very different.
If you want mid to long-term investment returns (like anything above 5%) then stick to index funds, or mututal funds or stocks/bonds.
3Y or 5Y SPE are invested in short-to-medium duration fixed income which over the last few years have given very good returns due to extremely low interest-rate environments. A good short-duration (<=3yrs duration fixed income) unit trust will give 23% returns over the last 5 years, with just a -4% downturn in 3Q 2011.
SPE returns nowadays are similar to money market funds (~2.5 to 3% over last 5 years). However with money market funds, you can simply buy & sell anytime, anyday without any penalties, unlike SPEs. And there's no sales charges for money market funds.
As for insurance cover, the price for such watered-down short-term cover is actually very very cheap. Most SPEs sold now are also not focused on the insurance cover — just return back of capital. That's why many SPEs don't even bother with health declaration for insurance cover.
Insurance companies sell SPEs not for insurance purpose, but for savings with at least money market-like returns. And customers buy SPEs for exactly that reason. Nothing to do with insurance.
That's why since 2000 only clueless customers buy SPEs.