A reader asked us recently about an insurance related matter.
Here is the question:
“I was recommended Great Eastern’s Family 3 plan (10-year premium) by a friend, and I wanted to know how effective it is as a savings plan. I understand that my ability to pay for the plan is important – I am currently a junior studying in NTU and working part-time, and I have been able to save quite a sum for the past few years.” – DollarsandSense Reader
The reader, despite still being a student, has already taken an early interest in personal finance matters. That is great because planning early is an important component for future financial success.
Our reader has saved up money and is now looking to make better use of her money. She spoke to an insurance agent friend who proposed the Great Eastern’s Family 3 Plan to her.
Understand Your Financial Objectives First
All too often, we spend money buying things that we don’t really need. It could be small items, such as the purchase of a gopro camera that we really wanted (and not needed) after seeing someone else have it. It could be a big-ticket purchase, such as getting a new and expensive Audi A3.
Buying insurance is no different. Before we get any insurance policies, we should first understand our own financial objectives.
These objectives would vary for each person. It would also change as we enter different phases in life.
Some objectives could include; investing your money to earn higher returns, building up cash savings for a rainy day, creating a stream of passive income, having sufficient health insurance coverage, and making sure your family is well covered financially if you are not around. These are all objectives worth considering and pursuing.
Look At Instruments Or Products That Serve Your Needs
Our needs and wants are limitless but our financial resources are not. It’s easy for a financial planner to say that saving, investing, insurance and retirement planning are all important, and share with us products that they think we should buy. Ideally, we would love to buy them as well. But all these things cost money that has to come from somewhere, and at the expense of something.
The other thing to remember is that not all our financial needs can be solved by buying an insurance product. Insurance companies seeking business opportunities will (almost) always have a product that is “tailored” to serve your needs. That doesn’t mean you have to get them.
If your objective is to build up sufficient savings for a rainy day, then what you probably need is a saving account that pays good interest, not an endowment or savings plan from an insurance company.
If your objective is to ensure health and life insurance coverage, then you will need health and life insurance policies.
If your objective is to invest your money and let it work for you, then you should be looking at the stock and bond markets, rather than buying an investment-linked policy that combines both insurance and investment.
Get what you need, rather than what your insurance agent is trying to sell you.
Is The Great Eastern’s Family 3 Plan Any Good?
Let’s first try to understand the product. The Great Eastern’s Family 3 Plan is a product that provides payout and insurance benefit for 3 different generations. Here is how it works.
Dad buys the policy. He pays an annual premium of $9,165 per year ($764 per month) for 10 years. Total premium paid is $91,650.
In return, Dad receives a payout of $800 per year for 8 years and then continues to receive a further projected payout of $4,000 every year. This annual payout to Dad can be transferred to his son, who would then continue to receive the payout until he passes away. Subsequently, the death benefit payout would be paid out to grandson.
Here is the breakdown of the projected payout.
|Dad||$66,400 (through annual payouts)|
|Son||$160,000 (through annual payouts)|
|Grandson||$202,400 (death benefit payout)|
*The payout shown above is not guaranteed
The answer to whether this policy is good depends on what your question is.
As a tool to provide for the future generation, this plan seems pretty attractive. With an initial premium of $91,650 during the first 10 years, the benefit illustration shows a total payout of almost 5X the premiums over the next 50 to 70 years.
That is not to say you can’t achieve the same returns doing your own investing. 50 to 70 years is a really long time and gives you ample time to compound your returns.
As a simple comparison, if you were to invest the same amount at a return of 5% per annum, you would have received close to $500,000 after 45 years, excluding any payout.
If you want to leave a little extra something for your children and grandchildren, we think this plan is a sensible one to pick up, so long as you have a little extra today and can take care of your own future needs.
What About A Savings Plan?
As a savings plan, this policy is really an odd choice, since it does not provide much flexibility for cash withdrawal. Benefit for the plan becomes apparent only after a long period of time that spans multiple generations, with the future generation enjoying the bulk of the benefits.
In fact, one might even say that this product is more relevant to those who are thinking of estate planning, rather than savings.
Our answer to the reader’s question is that we think it is ineffective as a savings plan. Yes, you would be “forced” to save money every year for the first 10 years. But the purpose of the savings plan is really for your children and grandchildren, rather than yourself.
It boils down to what you are looking for.
What We Can Learn?
Financial planning is important and questions like what this reader has asked ought to be asked all the time. Web sites cannot answer all of this customised questions so financial planners continue to play an important role to us, but only if they themselves are knowledgeable and act in our interests, and not the interest of themselves or the companies they represent.
As an individual, our duty is to first understand our own financial objectives, before choosing a product based on these objectives. We should approach financial planning in this way.
At the end of the day, there is no point in saving hard and setting aside money to buy a financial product that does not get you closer to attaining the financial objectives that you have set for yourself in life.
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