My girlfriend was approached by one of the Great Eastern (GE) agents at an MRT station. She was recommended the Annual Cashback Endowment (ACE) Plan and her initial thoughts was it sounded good as there were cash back and the investor will get more than the premiums he or she paid. She asked me if it was a worthwhile plan and I shall share with you what I explained to her in this post.
Let’s assume the best case scenario which all the cashback are reinvested and allowed to compound till the end of 18 years. The returns from ACE plan was not able to beat the returns from STI ETF. Of course, some will say it is an unfair comparison because the premiums for ACE are mainly invested in bonds while STI ETF has equity returns. I do not think this is a concern because if I am an investor, I will want to put my money where I can get the best returns based on my risk tolerance. If I can take equity drawdowns, I will want equity returns.
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GE used an example of a male, non-smoker, age 30 next birthday, with basic sum assured S$30,000 in the calculation. I have offered a side-by-side comparison with STI ETF SBP + Term insurance in the table below.
I could get a return four times that of ACE’s with STI SBP. In addition, I used part of the money to pay for a term insurance. Considering 18 years, it is a long enough period for the STI ETF’s return to be close to the average of 8-9%. In fact, I would rather pay more for a higher coverage with a term insurance and invest the rest in STI ETF. I will be better protected and come out richer after 18 years.
All is not lost for such endowment plans. As I mentioned in the earlier paragraphs, only invest in STI ETF if you can take the gyration in the stock market. If you are not able to stand firm and sell during a market crash, you will lose money. The ACE Plan has an advantage in this aspect as your money should be growing every year albeit slowly. This eases your psychology tremendously. Again, it depends on your risk tolerance and I cannot stress that enough.