traumfanger Wrote:On the red portion I highlighted in your appreciated response, my friend was showed data of endowment related policies and the clients are receiving more than the non-guaranteed percentage showed in their policy. So they seems to be making a return on their investment? And when this kind of information is showed it is hard to refute that you are making losses? Yes, it can be said that past performance is not indicative of future performance. But this argument is reflective of self-investment or funds investing.
The historical rate of return is meaningless unless you take into account the prevailing conditions during that period, the asset allocation during that period, and the associated costs. You then have to make adjustments for today's conditions and the outlook going forward.
One obvious difference today versus 10 years ago is interest rates. Whole life and endowment plans usually contain a large allocation to bonds. 10 years ago, interest rates were a lot higher. And for 10 years interest rates came down, which means there were large capital gains on the bonds.
Do you believe that interest rates will continue to fall? Because if you don't, then you must believe that they will either stay low or increase. If they stay low there will be no capital gains and the bonds will deliver their current 1-2% annual rate of return. If rates increase, these same bonds will post large capital losses. Any whole life plan or endowment bought today will suffer heavy capital losses on its bond portfolio in a rising interest rate environment.
Another difference is real estate. Whole life and endowment plans usually contain a modest allocation to real estate. Real estate prices went up a lot in the last 10 years. Do you believe, given the current unhappiness and the various cooling measures, that the government will allow the same rate of increase in future?
It is common to extrapolate the recent past into the distant future. It is also wrong. It is not enough to understand that something has done well or done badly in the past. It is also important to understand WHY if we wish to replicate the success or avoid the failure.
Again, if your friends do not wish to put in the time and effort (and maybe some money) to educate themselves, they have only themselves to blame if, in 20 years' time, they wonder why their whole life plans and endowments have only returned the low rate guaranteed by the insurers, instead of the above-guaranteed rates that they were shown by their agent 20 years ago. Or maybe they will just shrug their shoulders and say "at least we got the guaranteed amount". That's fine, but they will have paid an enormous "ignorance tax" and ended up much, much poorer than their peers who bothered to educate themselves and avoided such mistakes.
traumfanger Wrote:Are we boiling down to one point? Which is the fees and charges involved are too high for investment conducted through insurance company than a fund manager of your choice?
This is a separate issue from the above. Yes, the fees and charges are too high, which is why I believe that buying term and investing the rest is a much better choice for most people. As I have pointed out before, you can roughly achieve the same asset allocation as the insurer without too much trouble, which means that you can get roughly the same performance over time. If you are a smart investor you will actually do far better, which amplifies your edge. But just getting the same pre-fee return as the insurer already puts you ahead, because your fees are so much lower when you "buy term and invest the rest".
traumfanger Wrote:And through conversing so far, I am starting to think that the guaranteed clause is used too loosely? LIA, MAS will only guarantee the principal when a insurance company fails. Other than that, the investments related policies are subjected to the underlying performance of the funds involved? Am I right?
If the insurer sells a guaranteed product, the guarantee is subject to the insurer's ability to pay. If the insurer fails, obviously the guarantee is void. Many people look at the word "guaranteed" and think "bao jiak" (a sure win, they cannot lose). But a more appropriate response is: Guaranteed by whom? Can the guarantor afford to pay? Will they actually pay? What happens if they don't pay?
Too much work? Well, sure - outsource it. Just understand the enormous fees you are paying when you refuse to think.
There is a saying that "A person who does not read is no better than a person who CANNOT read". The same probably applies to thinking.
Thinking is the hardest work there is, which is probably the reason why so few engage in it - Henry Ford