I have had so many enquiries from my clients and others about their PruFlexiCash plans that I decided to review this plan first for my [Did your banker?] series. “Is PruFlexiCash good?”or “Should I terminate my PruFlexiCash?” are examples of the questions I have received. Which leads me to, why do they have these questions or regret?
Oftentimes, they were being sold the plan while at a bank or at a roadshow – either enticed by the freebies offered, felt pressured to commit on the spot, or just didn’t know any better. To me, this manner of committing to a financial plan is a big no-no. Firstly it skips the entire financial planning process and secondly, no comparison was done to find out if there are other plans that give a higher rate of return.
Okay Lah, Tell Me More About PRUFlexiCash Leh
PRUFlexiCash is a regular premium endowment plan that allows you the flexibility to receive an amount of money (or “cashback”) every year till end of the policy term. Such plans are otherwise known as anticipated endowment plans. Its structure is better explained by the very simplified illustration below:
FALSE: PRUFlexiCash Gives Me 5% Guaranteed Return
One of my clients was falsely under the impression that his PruFlexiCash plan gives him 5% guaranteed return. It turned out that he was referring to his guaranteed cashback. So, PRUFlexiCash does not give you 5% guaranteed return, okay? It gives you a guaranteed cashback every year that is 5% of the sum assured.
Endowment plans usually offer a rate of return or yield-to-maturity that is less than 5%.
So What is PRUFlexiCash’s Rate of Return?
Another client shared with me the PRUFlexiCash plan that she was pitched recently. I did an analysis of the cash values to find out the plan’s actual rate of return. This was done for both scenarios where the cashbacks are accumulated with the company and where the cashbacks are withdrawn:
Wah, seems not bad right? 2.76% rate of return is better than a bank’s interest rate leh.
How Does PRUFlexiCash’s Rate of Return Compare with the Others?
It would have been an easy comparison for consumers had all endowment plans follow the same structure. But, endowment plans from different companies have different payment years and maturity years structure, and it can be confusing for consumers when evaluating the plans.
The most objective way to evaluate then would be calculating each plan’s actual rate of return. A higher rate of return means that the plan is better at growing your money. The following table summarizes the rate of return of other endowment plans:
Plans are based on female aged 29, non-smoker.
Note: I have inserted the calculations for all rate of return calculations at the end of the article, if you are geeky about numbers like I am B-)
Company W’s limited-payment endowment plan (with cashback feature as well) offers a pretty impressive 3.27% rate of return. Further, do you know that Company W has never cut their bonuses for the past 69 years, even during the 1997 Asian Financial Crisis or the 2008 Global Financial Crisis?
An insurer’s ability to meet its projection is also a consideration when looking at endowment plans, but that will be another discussion for another day.
Wow I Didn’t Know That, What Else Should I Take Note Of?
Guaranteed Maturity Value
This is PRUFlexiCash’s benefits illustration:
Is there anything amiss with the numbers? Why is the guaranteed maturity value less than the total premiums paid?
Some bankers may justify it is okay, because “once bonuses are declared, they are guaranteed what!” Yup, that is right.
However, imagine the unfortunate event where the insurer has had a few bad financial years and bonuses were cut. When your plan matures, you discovered that your maturity value is less than the total premiums paid! How strong a case do you think you have if you would like to appeal against what you have received? Your signature is there right at the bottom of the page.
Let’s look at the guaranteed maturity value again for the two plans I shared earlier:
In spite of offering a higher rate of return, these plans still offer a guaranteed maturity value that is at least equivalent or slightly higher than the total premiums paid!
Endowment plans are supposed to be low-risk products. Hence, the guaranteed maturity value being less than the total premiums paid is not acceptable to me.
Different insurers have products that they are strong in and products that they are not. If a particular product has room for improvement, consumers should be aware so that insurers can improve on it. The truth is that there are other endowment plans where the guaranteed maturity value is also less than the total premiums paid, and PRUFlexiCash is, but just one example.
At the end of the day, consumers are the ones who will be the most impacted because their commitment to the plan is long term. And because the implication is long term, it is only right that we exercise due awareness before we commit to any insurance plan.
Do You Need the Cashback Feature?
In general, endowment plans that allow you to withdraw portions of the plan’s value throughout the policy term tend to give a lower return than plans that do not. Thus, if you do not need this flexibility, my advice will be to choose one that matures as a lump sum. Such as these two plans that offer an attractive “interest rate” of 3.90% and 3.83%:
Before You Commit to Any Endowment Plans
PRUFlexiCash (or any type of endowment) is a long-term financial commitment. Early surrender of the plan may lead to you receiving an amount less than whatever you have paid.
Before you commit to any plan, it would be best to go through the financial planning process to ensure that the plan is suitable for your financial objectives, time horizon, and risk profile. You should also discuss with your financial advisor about your future commitments, so that a comfortable budget can be worked out. Then, make sure that the plan proposed is one that makes your money work the hardest, because we Singaporeans are already working so hard for our money!
If you would like to understand more about your PRUFlexiCash plan or about the endowment plans discussed here, you can drop me a message at the contact box.
Note: Author is a financial planner with one of the largest independent financial advisory firm that partners with most of the insurers in Singapore.
Calculations of IRR