Endowment and annuity policies 'trap'

When I step into any of the well-known local banks, one thing that never fails to irritate me would be having financial advisers (or whatever position the bank prefers to call the personnel) coming to sweet-talk me into putting my money 'somewhere with better returns' when all I was there for was to open an FD account. Upon further probing, the products or package that they are trying to sell me are none other than endowment or annuity policies.

By definition of wikipedia -

"An endowment policy is a life insurance contract designed to pay a lump sum after a specific term (on its 'maturity') or on death. Typical maturities are ten, fifteen or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness."

"An annuity is a financial contract in the form of an insurance product according to which a seller (issuer) makes a series of future payments to a buyer (annuitant) in exchange for the immediate payment of a lump sum (single-payment annuity) or a series of regular payments (regular-payment annuity), prior to the onset of the annuity."

The policies are often beautifully packaged as 'saving plans', deposits $xxx every month and you will get this projected amount after xx years with x% growth. And sometimes they would throw in a few goodies like "you can enjoy a higher interest rate in your savings account" or "you can put your FD for x years at a higher interest rate". Some policies you would be able to do a partial redemption after say 3 or 5 years.

Before getting all enticed by the figures and signing on the dotted line (to part with your cash), here are a few things you should consider:

1. Do I need to use a big sum of money in the short terms? For example - buying properties, investing, family expenses. Because once you put them into the plan, it is a commitment on your part. Those money are being 'locked' in and there's no way you can withdraw them without suffering a penalty subjected to the mercy of the policy issuer.

2. Is it capital-guaranteed? Are the returns guaranteed?
Often you will see the words "for illustration only". Nuff said.

3. Can I put my money elsewhere that would reap me better returns with no lock-in? Say maybe the SSB...

4. What are the costs involved? (eg. how much are the admin charges, how much of the savings go to premium payment, what are the penalties for early termination)

5. Am I already adequately insured?
There is no need to buy a financial product which you don't need in the first place. Whatever perks that the bank gives would not offset the amount of money you need to cough up into the policy and any opportunity cost.
You need to be insured only when you have liabilities. How much you need to insure is proportionate to how much liabilities you have. Imagine if you are age 55, with children all grown up and working, housing loan fully paid for and a comfortable sum of money for retirement - you want to buy insurance? For what??!


I recalled buying an endowment policy some years ago which showed an illustrated interest rate of 2.5% and this was what happened one year after my purchase - http://www.aviva.com.sg/pdf/SAYP_Website_Update_-_Int_Rate_Table.pdf. It has not seen daylight since.

I was like '***!!!'. (Fine, blame it on the Lehmen crisis.)
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So always remember when things sound too good to be true, they most probably aren't true.