Back in early 2013, I was a first jobber who had just received my first few pay cheques. As typical of a Chinese household in an Asian society steeped in Confucian teachings, I was eager to start giving monthly allowances to my parents. Since this occurred a decade ago and with my recollection of it relatively hazy, maybe the correct version was that they constantly reminded me of my responsibility. Anyway, I am very careful when it comes to giving my parents money as my dad will squander them away in an instant. With my limited knowledge on personal finance then, I bought a limited pay endowment insurance policy for them on the advice of my insurance agent then. He was a friend of mine who had also graduated recently. Anyway, this endowment policy had recently matured and I performed a review as I was curious to know how it had performed.
What insurance did I buy?
Firstly, I bought an endowment policy which comes with both insurance protection and investment return (guaranteed and non-guaranteed bonuses). It is not to be confused with universal life policies which are often denominated in USD and the sum assured and cash value can be adjusted even after inception.
Specifically, I purchased a Limited Pay Revosave (5 Pay 10) from NTUC Income as shown in Diagram 1.
This is a 10-year participating anticipated endowment plan with premium term of 5 years. In layman speak, I pay for only the first 5 years but policy will mature 10 years later.
The investment component comes in the form of accumulation of future bonuses or cash dividends. Note that it comprises of both guaranteed benefits and non-guaranteed bonuses. The insurance component comes in the form of protection against death and total & permanent disability (TPD).
The life assured and policyholder were my mum while I was just the payor. Since I just started working then, I had no savings to speak of so I elected for recurring monthly payments. When I made the purchase, these were the returns illustrated based on a 3.75% return as shown in Diagram 2.
Now that this endowment policy has matured, I was curious to know how it fared especially since this was the first ever insurance policy I purchased upon graduation.
Financial performance of an endowment policy
It was easy to track the financial outcome of Income’s Limited Pay Revosave since I have all the records of payments and bonuses declared. I had also elected for the bonuses to accumulate with Income over the years.
To find out its financial performance, I keyed in all the monthly financial contributions and the final payout of $24.4K as the output. On an excel formula, I ran an XIRR formula to derive its internal rate of return. It turned out that Limited Pay Revosave returned 2.0% during the time period of 2013 to 2023. When the cost of the rider is included, the return dropped to 1.7% instead.
Looking at these numbers in isolation is rather meaningless so I did some benchmarking. The first benchmark that crossed my mind was the consumer price index. I need to know that my parents’ purchasing power had at least been protected with this investment. Since 2023 is still ongoing, I traced the consumer price index between 2012 to 2022 using MAS eservices. As shown in Diagram 4, this was a decade of low inflation with a compounded average annual inflation rate of just 1.2%. How odd this number would look today when inflation is at a giddy rate of 5%.
I was definitely surprised to learn that even a return of 1.7% comfortably beat the consumer price index. I then tracked the performance of the Straits Time Index between 2013 to 2023 as shown in Diagram 5.
Comparing the same period, the internal rate of return for STI ETF was 3.1%. That means I would have been better off investing the money into an index instead of purchasing this endowment policy. However, such a comparison overlooks 3 things: (1) this IRR is based on a lump sum investment at the start and not a dollar-cost averaging strategy for 5 years, (2) the protection component which is not afforded by STI, (3) as silly as it sounds, the 25-year-old me then did not even know how to purchase a stock, let alone an ETF. Therefore, I would not have been able to employ the “Buy Term, Invest the Rest” strategy back then. I imagined that I would have faced several obstacles that would potentially delay my investment or worse, not even make that first step at all! Another benchmark worth comparing would be a bond fund ETF.
This article highlights that even as a financial blogger, I do not always make the most prudent choices when it comes to personal finance. But it shows the importance of starting somewhere and that it is more important to take action on your personal finance than not do anything at all. The latter is bound to see your purchasing power gets eroded by inflation.
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Are the returns in terms of cash payout and maturity benefit in line with the projections in the benefit illustration?
The benefit illustration used 3.25% and 4.75% I think my calculation speaks for itself.
Hope I am reading the BI correctly… Projection was $25,210 but when your policy matured, income paid $24,438? (~3% lower than projected)
3.25% and 4.75% actually refers to the performance of your insurer’s investments which brings you the projected yield for your endowment policy.
Yeap, I am aware! Thanks.
Personally I don’t thinks it Is fair comparing return this way.
1. At the point of time what is you affordably?
2. At the point of time What is your risk tolerance?
3. What is the reason you pick up this policy?
Regardless good for you that have thought of wealth accumulating and at a young age.
And You have collected your first wealth accumulate from this good job.
An advice I would like to share is to do your policy review at least ones a year this it so that you keep a fresh perspective on what are the policy is doing for you and does it fit you current life goals also to avoid the late realisation of policy is not doing DCA as you mentioned.
All provider and their policy are ever changing so is your lifestyle.
Hey, thanks for your thoughts. I understand that this comparison has its own flaws. Nonetheless, appreciate your insights which allow me to view this from a different light.