Parking your dollars in endowment policies: Does it make sense?

At first brush, DBS Bank's 'durian' looked like an irresistible buy.

In late June, the bank launched its so-called G22 endowment policy, using the durian as its logo. Unlike durian sellers, the bank did not sit around and wait for customers to come by and sniff its goodies. Instead, among other things, its sales force hawked the 'durian' to passers-by and customers at many branches. As a result, more than $300 million worth of G22 policies were sold in about six weeks.

The customers probably considered the 'durian' attractive enough - especially when compared with fixed deposits - but they apparently did not realise that four other similar products are, well, tastier.

G22's return is 2.52 per cent a year compounded, which trails the return of between 3.4 per cent and 3.6 per cent offered by other plans offered by NTUC Income and some banks.

It works like a typical endowment policy: You put down a lump sum and you get life insurance cover as well over a defined period of time.

The key difference: your gains are guaranteed.

Here is a guide to evaluating such policies to help you locate the tastiest 'durian' next time:

Lock-in Period

Guaranteed endowment policies require you to stay invested for a long period. That is something you have to bear foremost in mind. For example, it is 10 years for the NTUC Income Capital Plus policy and eight years for DBS' G22 product. If you quit before the maturity period, you get lower returns. Worse, if you need the money back in the initial years, what you get back may be less than what you had put in.

Says business consultant Lim Koon Hock, 49: 'I really don't like the feeling of being stuck for 10 years. 'Anything could happen during that period. The world is changing too quickly and economic cycles may be getting shorter.'

Mr Simon Liew, an investment strategist with Frontier Wealth Management, says that if you have such a long investment horizon, you should consider instruments which are riskier but have the potential for juicier returns. With a longer time horizon, you are less likely to be under pressure to sell should the markets head down for a while. Says Mr Liew: 'We are in the early stage of an economic recovery. The trend is up and we have maybe another four or five good years. I think to get 8 per cent a year is not difficult. The downside is quite low for a long-term investor.' He recommends funds that invest in stocks in a spread of Asian markets.

Effective Return

Total return is one thing, the effective return on a per-year basis is another thing. The G22 durian guarantees a return of 22 per cent after eight years. Some policies guarantee a return of around 40 per cent after 10 years.

'When the return is presented as a 40 per cent gain, it sounds like a lot,' says Associate Professor Benedict Koh, a co-author of the book Personal Financial Planning. 'Most people don't know how to compute it, but on a yearly basis the rate is only around 3.4 per cent. This is slow growth.'

Product sellers would state the annual rate but it will be in smaller print in advertisements and brochures. If the returns look good now, they may not be so in future when other instruments offer better returns.

'Interest rates are expected to rise, I would not want to lock myself into present low rates,' says polytechnic lecturer Gerard Francis, 44.

Prof Koh, who teaches at the Singapore Management University, agrees: 'We will lag behind US rates but we will track the US rates and trend up.'

But exactly how high rates will rise and when, no one really knows.

Risk Appetite

There are people who won't take risks at all, and they are happy to lock up their money in fixed deposits for a year, two years, even three years, according to Ms Lisa Lee, head of financial advisory at Phillip Securities. For such people, guaranteed endowment policies will give a better return than fixed deposits without taking on extra risks. But generally, the number of such people is declining, compared to a few years ago when the economy and financial markets were uncertain or falling, says Ms Lee.

That is until a catchy and aggressive marketing campaign comes around.

For people who are looking for a regular stream of income, most guaranteed policies will not meet their needs since the payout comes only at the end of the maturity period.

An exception is the G22 policy which hands out some money at the end of years two, four, six and eight.

For Good Measure

In evaluating an investment possibility, you would do well to compare it with similar products. Compared with fixed deposits, guaranteed endowment policies come out looking attractive.

The endowment policy with the shortest tenure is an offering launched a few days ago by Overseas Assurance Corporation, a unit of OCBC Bank. The policy's return is 1.35 per cent a year compared to 0.875 per cent offered by banks for two-year fixed deposits of below $50,000. There are no eight-year or 10-year fixed deposit tenures to compare similarly long-dated endowment policies with.

For such tenures, Prof Koh would compare endowment policies with Singapore Government Securities, which can be bought by retail investors through Fundsupermart.com. These are bonds that come with various tenors, including 10 years.

At 3.4 per cent, the bonds' 10-year yields are comparable to 10-year endowment policies - and the interest payments and capital are guaranteed by the Government. The bonds also offer income tax savings if bought through your Special Retirement Scheme (SRS) account. Similarly, if you buy endowment policies through your SRS, the purchase amount - subject to a cap - will be deducted from your taxable income for the year, which means that you enjoy tax savings.

But unlike the endowment policies, Government bonds do not come with insurance protection. The payout is 150 per cent of your investment should you die or suffer total permanent disability.