Marketing of endowment plans needs regular review

Monday's report did a good job of highlighting the pitfalls of buying endowment policies ("Insurance premium higher than her pay").

These policies are equivalent to savings plans but, because they are operated by insurance companies, they are required to include a minimal insurance component.

In the early days, the promised returns of endowment policies were based on the insurers' best estimates. This led to results that can be quite different from those in sales illustrations.

The main problem is that such plans are usually for medium to long terms of between six and 20 years. Over the years, the investment climate can change and insurers can, in fact, suffer setbacks on their investments.

The regulations for marketing such policies were tightened in the 1980s; all insurers were allowed to show only three bands of estimated returns - low, average and high - and these projected returns are fixed for all insurance companies to ensure equity in all illustrations.

However, in the 1980s, the average savings rate was around 5 per cent. The fixed rates were pegged at 3.25 per cent for the worst-case scenario.

But the best economy forecasters did not factor in a prolonged low interest-rate environment.

Bank savings interest rates have gone below 1 per cent for the past decade and this has affected insurance companies' investment returns. Most of them would be hard-pressed to deliver even the worst-case scenario illustrated in their sales and marketing materials.

My 10-year endowment policy recently matured and the return received is lower than the total premium paid over the 10-year period. This is partly because there were charges for investment fund management and insurance mortality, as well as an administrative fee.

Monday's report is timely, as it serves to remind regulators that the interest-rate environment has changed and there is a need to regularly review projected returns, to prevent more retail investors from being lured with false expectations.

Geoffrey Kung

A version of this article appeared in the print edition of The Straits Times on October 08, 2015, with the headline 'Marketing of endowment plans needs regular review'. Print Edition | Subscribe