However, there's a catch. The maturity date is 25~35 years later, with perhaps a 1~3% annual rate compounded over the 25~35 years.
To me, the main reason why people buy saving plans are because
(i) Super Duper Conservative
(ii) Financial Ignorance
In my opinion, if one were to lock up the money into a savings account for 25 year, it would be better to do dollar cost averaging into equities dealing with defensive sectors of the economy. Over the period of 25 years, the rate of return beating that of a savings account is almost 100%.
"But dollar cost averaging requires lots of money! I don't have the cash to do that when most of the blue chips are in thousands per lot! A savings account is safer and better for me!"
Well, one simple way in which we can automate a dollar cost averaging strategy like a savings account, is to make use of POEMs' sharebuilder plan.
http://www.poems.com.sg/FinancialServices/sbpFAQ.asp?value=sbp
Selecting equities like Starhub (8% yield), Singtel (4% yield), SingPost (6% yield), SPH (6% yield), or even STI ETF presents a low risk and high probability over a period of 25 years in beating a savings account. Suppose the prices of these equities remain the same for 25 years; the dividend yield would easily exceed that of a savings account.
If one were to take slightly higher "risks", equities like UOB, DBS, OCBC, SGX are just as good.
In short, why go for a savings plan? There's no guarantee that the insurance company selling you the savings plan will not fold up as well. Essentially, the risks of the company folding up is the same. Yet the yield is so much lower. Compounded over 25 years, the difference could be quite high for quite similar risks. At least to me, it is. That's why, I will not go for a savings plan.
I will try to add some calculations here later.
I am one of those idots
ReplyDelete(i) Super Duper Conservative
(ii) Financial Ignorance
got this ILP plan when I started working, thru an insurance agent. When the market rises, the units almost have no movements. But when the market falls, the % drop is far higher than the market !
Now that I started playing dividens stocks, I will cash out this policy. Take the cash portion and wait for a good time to enter the market. But meanwhile I will buy a term policy to cover my needs.
Chai Tau
Hi momo,
ReplyDeleteThere is one redeeming feature of savings plans/endowment plans. There is a rider that you can buy that will continue to 'save' on your behalf when the insured has passed away. To me, that is the only feature of savings/endowment plans that is important and cannot be ignored. Of cos, you can also buy a life insurance to get a lump sum amount, but we're talking about only savings/endowment plans here as the subject of debate.
If you buy your own funds/stocks, the savings will cease once you are deceased.
Hi momo,
ReplyDeleteSorry, forgot to link this post on endowment plans up here for your reference:
http://bullythebear.blogspot.com/2010/02/endowment-plan-option-for-education.html
Hi Jimmy,
ReplyDeleteI have a term policy too!
I'm not a financial advisor, nor am I qualified, so do take my posts with a pinch of salt :)
Hi LP,
ReplyDeletethat's true. But to me, there's only so much the rider can do. As for uni, I got a scholarship. I would want my children to strive for that too.
In the event if my ventures fail, they can still borrow from the bank and pay back at the end of their education through their own work, like what most fresh grads are doing now.