Pay me $200 per month for 20 years, and I will invest it for you.
In the first year, all your money will go to me. After that, I'll invest it, but I won't tell you where it is invested, how much I take for expenses or even the rate of return you earn.
Life insurance companies offer this for two popular policies -
(i) endowment, including education and (ii) whole life.
Sales have been phenomenal. On average, each Singapore household owns $55,000 of these.
This makes it the second largest investment after our home, yet these policies are often surrounded by mystery.
The key to solving it lies in the benefit illustration which is filled with facts and figures. Let's investigate.
RevoSave is the most widely promoted insurance policy this month. Its ads read: 'Save for a rainy day. But enjoy all the sunny ones too.'
This 20-year endowment insurance seems to have everything - savings, investments and a regular payout.
You can choose one of three options:
1. Option one: Cash back.
RevoSave advertises 'a guaranteed Cash Benefit at 5per cent of the sum assured'.
It sounds good but don't get too excited. The company is simply returning your own money and calls it a 'cash benefit'.
What you really earn is not 5 per cent. It is 2 per cent. And since only half is guaranteed, you may get even less.
A fixed deposit or money market fund pays more and it is guaranteed.
It also doesn't lock up your money for 20 years.
Most troubling is that the true return (2 per cent) is so well hidden. You won't find it in the benefit illustration, the product summary or the brochure.
Since it's missing, many people focus on the number they see - the 5 per cent cash back. It is easy to confuse 'cash back' with 'earnings' since the brochure says the investment 'will give you an annual 5 per cent fixed return for 19 years'.
2. Option two: Life fund.
Here, you don't take the payout but keep your money in NTUC Income's $16 billion 'Life Fund'. It is where all premiums from endowment, whole life and annuities are invested.
This option has problems too. One is that the life fund invests everyone's money in exactly the same way, regardless of their risk preferences.
A recent graduate and an 80-year-old granny would prefer different levels of risk. But in a life fund, they share exactly the same investments.
The life fund also doesn't report expense ratios or tell where it invests your money. You aren't even told the price at which you bought and sold.
I estimate the return at about 3.5 per cent. It is not guaranteed and the lock-in is 20 years.
3. Option three: ILP.
This option invests part of your premiums in an investment-linked product (ILP).
Page 1 of RevoSave's benefit illustration states in bold capital letters:
Coupon invested in an ILP fund to earn 5 % p.a.
It sounds good but 5 per cent is only an estimated return on your coupon, which is about 60 per cent of your investment. The other 40 per cent earns less.
On top of that, you must pay a 1 per cent management fee. It lowers the expected return to 3.67 per cent.
Actually, it is a little less since this figure assumes you pay all your premiums one year in advance.
If you pay monthly, the return falls to 3.4per cent, which is never mentioned.
Only half of that return is guaranteed, it takes 10 years to break even and the lock-in is 20 years.
All you need to know can be found in a policy's benefit illustration. But RevoSave's is 10 pages long and has 350 numbers. It is overwhelming.
Which numbers are important?
The key to everything is the rate of return on your investment. Do you earn 1, 2, 3 or 5 per cent per year?
It is very hard to know.
I was able to calculate the returns with a software that I use - RevoSave's three options pay 2.0, 3.5 and 3.4 per cent.
Most people, however, would not be able to do this. They would assume what they see in the brochures is what they earn and these numbers are much higher, often around 5 per cent.
