What did I do with my savings plan in the end?

A long time ago, I wrote a couple of posts on thinking if I should be cancelling my savings plan on the belief that investing the money that I can get back, as well as the remaining premiums to be paid up till maturity, will pay off greater returns.

These received substantial comments - a mixture of advice, encouragement and critique.

You can access the articles here if you wish:

• Cancel my savings plan in pursuit of greater investment opportunities?
• Cancel my savings plan in pursuit of greater investment opportunities? (2)

Today, I will revisit as I have gotten some more recent questions. I think it will also be a great idea to write on this and then update the older posts so as to offer closures. Of course, I will be more than happy to continue entertaining any future questions or comments.

Okay, here we go!

Daniel asked:

Hi, did you surrender this policy eventually?

Anon asked:

"Just came across your post about this and am currently in the same position you were- should i surrender/sell policy to third party to take the loss and Invest it myself? Or just let it ride..

I chose a 5 year payment for myself but quite a big annual premium with 2 more to go.

Could I ask where you stand on this now a year later? And why did you choose a 20 year payment instead of 5 or 10 years of premiums?"

I have commented to follow up on the post, then the idea of putting these in writing gave an opportunity to expand on my answers when compared to the original comments.

On trying to sell the policy but not succeeding, and then mulling choice between surrender or keep
Initially, I tried to get a quote for my policy, but I did not receive any replies. This boils down to the choice of surrendering or keeping.

Overall, with how my investing journey on the stock market was lacklustre for the past 18 months, it could be good to have a backup in case of investing FUBAR.

In the end, I have chosen to let it ride, and probably intend to leave it till maturity and beyond. But that's not all I had done to the plan.

Changing the rate of premium payment
But what else have I done?

I changed my premiums payment from monthly payment to yearly.

I am not so sure about the other savings plan out there, but in my case, one has to pay more for monthly premium charges - close to 2% - presumably some sort of administrative charges - which does not contribute to any returns. If you are giving your premiums monthly for other savings plan, do check with your financial planner.

Basically whatever returns I am meant to get for each year gets reduced 2% p.a if I kept the monthly premium up.

The length of the plan till maturity
The choice of 20 years instead of 5 or 10 years was a bit of an uneducated choice. I started on this plan before I started educating myself financially - primarily failing to appreciate how to better exploit the effect of compounding interest and not yet learning about other investment mediums.

A long time ago, I wrote a couple short posts on the effects of compounding interests:

• Effect of Compounding on Principle Amount (and Ongoing Fund Injection)
• Effect of Compounding Part 2 - Early Repayment for a HDB Housing Loan

If I were to go back to the decision point, I would want to change to a 5 year plan (t then I can just start another plan if I wanted to).

Let's run some numbers, shall we? We shall explore 2 conditions for the 5-year, 10-year and 20-year plan:

• Same amount of yearly premiums (pay 2400 yearly till maturity)
• Same amount of total premiums paid, spread over the period of the plan (48000 total sum)

I'm assuming the following for simplicity (in reality, where got so good, right? haha):

• 3% annual returns before compounding 
• Continuing to hold until policy year 30 without withdrawals or surrendering.

Scenario 1 - Same amount of yearly premium (2400 per year) until maturity

The first scenario, minus looking in-depth into the compounding effect, was what I had in mind when I bought the plan, looking at only enforcing myself saving up via the plan.

Based on the above, the Compounded Annual Growth Rate (CAGR) of this at the 30th policy year will be:

• 4.18% for the 5-year plan
• 3.65% for the 10-year plan
• 2.69% for the 20-year plan

Unsurprisingly, the CAGR of the 20-year plan and, to a lesser extent, the 10-year plan, falls behind the 5-year plan; the premiums given in the latter years have had less time to work their magic. The only reason why you have saved more via the plan is that it is being enforced. Whether that accomplishes your intended objective, that is another question.

But what about the second scenario?

Scenario 2 - Same amount of total premium (48000), spread over the period of the plan

The second scenario - that is, same amount of total premium, was what I failed to consider at the time when I decided to buy my savings plan. The CAGR from the first example applies, but the principal sum for the 5-year plan, and to a lesser extent, the 10-year plan is now working much harder than the 20-year plan as the total premium was given earlier.

So Anon, if you are reading this, while it is up to your discretion based on your preference or risk appetite, I feel it should be fine to keep the savings plan. For your own info-gathering though, it is also no harm in trying to get a quote for the sale of your savings plan. You may garner some interest as it is more than half-way through your plan anyway, unlike myself.

Readers, do you have any savings plan or any experience to share regarding it? What are your thoughts about your savings plan?

Thanks for reading.