Saving insurance plan: is the return of saving insurance plan good?

Recently, I received a call from a bank mentioning a saving product which can offer me 20% guaranteed payout for the initial years if I save with them. No doubt, this is the feature of the insurance saving plan.  Does the 20% payout (interest) sound too good to be true?

Well, a lot of people do not understand how saving insurance plan works. Let me illustrate using one of the sample from X company.

The above is a 5 years’ insurance saving plan. The client will need to pay RM 6,000 premium every year for continuous for 5 years (total premium paid is RM 30,000). The guaranteed cash payment from year 1 to year 10 will be RM 660 yearly (11% of the annual premium) while the guaranteed cash payment from year 11 to 20 will be RM 1,200 (20% of the annual premium).

Many insurance agents used the 11% and the 20% Guaranteed Cash Payment as the motivation for the clients to buy the saving plan as the “interest” is much more higher than the current fixed deposit. However, the truth is – the 11% or the 20% is based on the yearly premium of RM 6,000. At the end of year 5, the client would have already paid RM 30,000 (RM6,000 x 5 years). Hence the “interest” is not 11% (RM 660 / RM 6,000) but 2.2% (RM660 / RM 30,000). In addition, if the clients are receiving the guaranteed cash payment every year, at the end of maturity (after 20 years), the client will receive RM11,970 – RM 30,897 as the maturity benefit. Why it is a range and not the exact RM30,000 total payment paid? Because the final amount depends on the performance of the fund. Normally the insurance companies will invest the amount into largely bond funds for higher return than fixed deposit. Hence, at the end of maturity, the client is not guaranteed to get back the total payment paid, if he chooses to withdraw the guaranteed cash payment every year.

What if the client does not withdraw every year? Well, based on past record, the return would be roughly about 3% to 5% per year. It might be higher than fixed deposit considering the low interest rate currently. However, there is no liquidity of the premium paid. Client will definitely suffer loss if early surrender of the policy, i.e. before maturity date.

So, in term of return, saving plan is not something that generate high return. It might be worst than fixed deposit considering the paid premium cannot be withdrawn easily (without loss) before maturity.

In conclusion, one may ask – what is the benefit of this plan?

• Saving plan provides liquidity of fund in case the death of the life assured. The saving plan is an insurance plan, hence, it will trigger immediate payout on life assured’s death to the nominee(s). Fixed deposit is not liquid upon the death of the owner. The amount saved in fixed deposit will be frozen until the grant of probate issued in this event. So, it is a plan to be considered in lieu of fixed deposit when one needs to pass down some money to the next generation without the need of will.
• Saving plan is a forced saving effort which is good for retirement saving effort. Based on research, more than 50% of Malaysians have insufficient retirement saving. As early withdrawal will incur early surrender penalty, the money is not easily assessible to the payer. Hence, the payer is more likely to continue paying the premium and not easily withdraw the saving. The saving becomes part of retirement saving after 20 years.

So, with the above, understand your reason of buying. If you need liquidity during your lifetime, saving plan is not something that provides that. If return is important for you, you might consider investment instruments rather than insurance plans.

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