Choosing the right endowment plan can be a daunting task, considering the numerous options available in the market.
With so many factors to consider, it’s important to understand the key aspects that make a plan suitable for your financial goals.
Whether you’re looking to save for your child’s education or planning for your retirement, this post will guide you through the process of choosing the best endowment plan.
#1. Financial Goals Alignment
Choosing the right endowment plan requires aligning the plan with your specific financial goals.
Whether you’re saving for a significant future expense, planning for retirement, or ensuring your child’s educational future, an endowment plan can be a strategic tool to help you achieve these objectives.
Here’s how you can align your financial goals with an endowment plan:
Identifying Your Financial Objectives
The first step is to clearly define your financial goals.
Are you aiming to build a nest egg for retirement?
Do you need to save for your child’s university education?
Or perhaps you’re planning a major purchase like a home or a car in the future?
Understanding your financial objectives will guide you in selecting an endowment plan that best suits your needs.
Matching Endowment Plans with Goals
Once you’ve identified your goals, look for endowment plans that align with them. For instance:
- For Education: Choose an education endowment plan with a maturity date that coincides with when your child is likely to start university.
- For Retirement: Opt for a retirement endowment plan that provides a lump sum or annuity payments during your retirement years.
- For Marriage: Looking to save for your wedding & perhaps a honeymoon after? Look for an endowment plan with the right maturity to meet this goal.
- For Housing: If you’re looking to save for a new home or a house renovation, an endowment plan is great to help you counter inflation while you reach your savings goals.
- For General Savings: If you’re looking to simply grow your savings, a regular savings endowment plan can be a suitable choice.
Endowment plans are typically long-term commitments. Ensure that the policy term matches your financial timeline.
For example, if you’re planning for your child’s education in 15 years, a 15 to 20-year endowment plan would be appropriate.
Understanding the Maturity Benefits
Be clear about what the plan offers upon maturity.
How much of the maturity amount is guaranteed, and how much is variable based on the performance of the fund?
This understanding will help you gauge whether the plan will likely meet your financial goals.
By aligning your financial goals with the right endowment plan involves understanding your long-term objectives, choosing a plan that matches these goals, and being aware of the flexibility and maturity benefits of the plan.
By doing so, you can make an informed decision that provides financial security and helps you achieve your future financial aspirations.
Remember, an endowment plan is a tool to help you save systematically for the future, so choose one that aligns seamlessly with your financial roadmap.
#2. Policy Term and Maturity
When selecting an endowment plan, understanding and choosing the right policy term and considering the maturity aspects are crucial.
These factors significantly influence how well the plan will meet your financial needs and goals.
Choosing the Right Policy Term
- Assessing Your Time Horizon: The policy term should align with when you need the funds. For example, if you’re saving for your child’s education, the policy should mature around the time they’re likely to enter university.
- Understanding Policy Duration: Endowment plans come with varying durations, typically ranging from 10 to 30 years. Longer terms often offer higher returns but require a longer commitment. There are also short-term endowment plans, which matures between 2 to 3 years.
- Impact on Financial Planning: Consider how the policy term fits into your broader financial plan. It should complement other savings and investments, not conflict with them.
Maturity Benefits Explained
- What Happens at Maturity: At the end of the policy term, the endowment plan matures, and you receive a lump sum amount. Depending on the plan’s structure, this amount can include both the principal and the returns.
- Guaranteed vs. Non-Guaranteed Maturity Amounts: Some plans offer a guaranteed sum at maturity, while others include variable returns based on the participating fund performance. Understand the proportion of each in your plan. More on this later.
- Using Maturity Proceeds: Plan ahead for how you will use the maturity proceeds. Whether it’s funding your child’s education, adding to your retirement corpus, or making a significant purchase, having a clear purpose helps in selecting the right plan.
- Lump-Sum vs. Annuity Payouts: Depending on your plan, you might receive a lump sum or monthly payouts – something like an annuity. Consider which option better suits your financial needs at the time of maturity.
- Reviewing the Plan Before Maturity: As you approach the policy’s maturity, review it to understand the exact amount you will receive and any actions you need to take. Remember that you have non-guaranteed returns, so knowing roughly how much it’s worth will help you plan ahead.
An endowment plan’s policy term and maturity aspects are pivotal in ensuring that the plan effectively serves your financial needs.
By carefully selecting the right term and understanding the maturity benefits, you can ensure that the endowment plan provides financial security and contributes positively to your long-term financial aspirations.
Remember, the key is to align the policy term with your financial timeline and have a clear plan for using maturity proceeds.
#3. Premium Payment Terms
Understanding and managing the premium payment terms is critical to selecting an endowment plan.
It’s essential to choose a payment structure that aligns with your financial capacity and goals. Here’s how to navigate through this:
Understanding Different Premium Payment Options
- Single Premium vs Regular Premiums: Endowment plans typically offer 2 types of premium terms – single (one-time payment) and regular (periodic payments). Single premium plans require a substantial one-time investment, while regular premium plans allow you to pay smaller amounts over time.
- Limited Pay Endowment Plans: Some plans offer a ‘limited pay’ option, where you pay premiums for a specified period, shorter than the policy term. This can be a strategic choice if you anticipate changes in your income in the future.
Assessing Affordability
- Budgeting for Premiums: Ensure that the premium payments fit comfortably within your budget. It’s crucial not to overstretch your finances, as defaulting on payments can lead to a policy lapse and a significant loss in your capital.
- Impact of Premium Frequency: Consider whether monthly, quarterly, or annual premium payments work best for your cash flow. Sometimes, insurers offer discounts for more substantial, less frequent payments.
Flexibility and Adjustments
- Adjusting Premiums: Check if the plan allows for flexibility in premium payments, such as increasing or decreasing the amount or frequency. This can be beneficial if your financial situation changes.
- Premium Holiday Options: Some plans offer a premium holiday feature, allowing you to pause payments for a certain period under specific conditions. Understand the implications of this on your policy’s value and benefits.
- Understanding the Grace Period: Familiarise yourself with the grace period for premium payments and the consequences of missing payments.
- Policy Lapse and Reinstatement: Know the terms regarding policy lapse due to non-payment and the process and costs involved in reinstating a lapsed policy.
By selecting a payment structure that aligns with your financial capacity and understanding the implications of premium payment terms, you can make the most of your endowment plan without overburdening your finances.
Remember, the goal is to maintain a balance between securing your future financially and managing your present financial obligations comfortably.
#4. Guaranteed vs. Non-Guaranteed Returns
When choosing an endowment plan, understanding the difference between guaranteed and non-guaranteed returns is crucial.
This knowledge will help you set realistic expectations and make an informed decision about your investment.
Here’s what you need to know:
Understanding Guaranteed Returns
These are returns that the insurance company promises to pay you, regardless of the performance of the underlying investments. They are stated explicitly in the policy document.
Guaranteed returns offer a safety net, ensuring that you receive a minimum payout at the end of the policy term.
While guaranteed returns provide security, they are typically lower than potential market returns, reflecting their lower risk.
For short-term endowment plans, they go on a tranche basis, investing in low-to-mid-risk debt instruments rather than a traditional endowment plan that invests in the participating funds (more on this in the next section)
Because of this, most insurers will market their returns as guaranteed (can be non-guaranteed, too).
I frequently see that they display this as absolute returns instead of annualised returns, but make sure you compare them based on annualised returns.
Non-Guaranteed Returns Explained
Non-guaranteed returns are based on the insurer’s investment performance. They can fluctuate and are not assured.
These returns have the potential to be higher, depending on how well the insurer’s fund performs.
Insurers provide illustrations based on MAS & LIA’s guidelines, showing different scenarios of non-guaranteed returns – usually at 3% and 4.25% in annualised potential returns per year.
It’s important to view these as possibilities, not promises.
We compiled insurer’s participating funds over the past 15 years and compared them in this post.
We found that over 15 years (2008 to 2022), half of the insurers could not meet the 3% per year in returns, while none of them were able to hit 4% rate of return.
The highest was 3.65% per year in annualised actual returns.
Most endowment insurance plans have a 20 to 30-year policy maturity, and there isn’t sufficient data to show that they can continue obtaining these returns for you.
Thus, use the illustrations by the insurers with a pinch of salt. Use our table below as a more accurate guide for your planning.
Understanding the difference between guaranteed and non-guaranteed returns in endowment plans is vital in setting the right expectations and choosing a plan that aligns with your financial goals and risk tolerance.
While guaranteed returns offer safety, non-guaranteed returns provide the potential for higher gains.
Look for an endowment plan that strikes a balance between guaranteed and non-guaranteed returns that aligns with your risk appetite.
Remember, an informed decision is the key to making the most of your endowment plan.
#5. Capital Guaranteed
There is also a capital returns feature – more commonly referred to as a capital guarantee.
Some provide 100% capital guaranteed, while some provide 80%, so it’s best to know if the policy offers some form of capital return.
You should also understand when this guarantee kicks in.
Is it immediate, or do you have to wait a certain number of years?
Based on my experience reviewing insurance policies, this can range anywhere between 5 to 10 years.
But what if the insurer didn’t specify if there’s a capital guarantee? Does that mean your capital is 100% at risk?
Not quite.
Look at your policy illustration and look for the table showing the surrender value.
Using this value, you can determine when your total premiums paid is equal to your guaranteed returns.
In simpler terms, it’s your ‘breakeven’ point – the moment when every penny you get is pure profit.
Having reviewed hundreds of policies, here’s a little nugget of wisdom: on average, the ‘breakeven’ point for long-term endowment plans usually falls between 13 to 17 years after holding the policy.
Although it’s a ballpark figure, it gives you an idea of what to expect.
For short-term endowment plans, your capital is usually guaranteed, but make sure to check just in case.
#6. Liquidity and Flexibility
When considering an endowment plan, it’s important to understand the aspects of liquidity and flexibility.
These factors determine how easily you can access your funds and adapt the plan to changing circumstances. Here’s what you need to consider:
Understanding Policy Liquidity
- Access to Funds: Assess how easily you can access your money during the policy term. Some endowment plans may allow partial withdrawals, but these could come with penalties or reduced benefits.
- Emergency Situations: Consider your options within the plan if you face an unexpected financial emergency. How will this impact your policy and its returns?
Flexibility in Terms of Premium Payment and Policy Adjustments
- Adjusting Premiums: Check if the plan allows you to adjust your premium payments in response to changes in your financial situation.
- Policy Term Adjustments: Some plans may offer the flexibility to alter the policy term, which can be beneficial if your financial goals change.
Okay, to be frank, almost all types of endowment plans don’t let you adjust your premiums, premium term, or policy term.
But there’s no harm in looking for a policy that might have one.
This highlights why you should really do your research and compare policies before purchasing.
Lucky you’re here reading this post 😉
Penalties for Early Withdrawal
Be aware of any penalties or fees for early withdrawal from your endowment plan, as these can significantly impact the amount you receive.
The earlier you cancel your policy, the higher the surrender charges will be, so make sure you know what you’re getting into.
Unfortunately, insurance companies don’t show you the surrender charges on the policy summary, and it’s usually in the quotation given to you by your financial advisor.
Here’s a tip from our partnered financial advisor, Jordan. You can call the insurer directly and ask them how much you would get if you were to partial/full surrender now.
They will give you an exact amount – both in guaranteed and non-guaranteed benefits.
However, if you decide to partial surrender (in other words, make a partial withdrawal), there will be an impact on your projected returns and benefits.
Get the insurer or your financial advisor to get you a new maturity illustration of your policy.
Policy Loans
Let’s say you don’t want to make partial withdrawals and would prefer to take a loan.
Instead of taking a loan from the bank or from your family and friends, you can take a loan from your endowment plan.
Understand the terms, interest rates, and implications of such loans on your policy.
It will come with unfavourable terms, but having the ability to access another source of funds is better than not having any liquidity at all.
Premium Holiday Options
When considering the flexibility of an endowment plan, check if there are premium holidays available for you.
This feature allows you to temporarily pause premium payments for a specified period, provided certain conditions are met.
This can be particularly useful in times of financial strain or unexpected life events that impact your ability to continue with regular premium payments.
Before opting for a plan, it’s important to check if this option is available and understand the specific terms under which you can take advantage of a premium holiday.
I know of a few plans that offer premium waivers if you’re retrenched such as the NTUC Income Gro Saver Flex Pro or the Singlife Choice Saver.
The Prudential PRUWealth lets you waive premiums for a year if you lose a loved one, while the Manulife ReadyBuilder II has a year of premium waivers after 2 policy years.
However, it’s equally important to be aware of the consequences that taking a premium holiday might have on your policy.
Pausing premium payments can affect both the policy’s overall value and the benefits you receive upon maturity.
Typically, taking a break from premiums may lead to a reduction in the final payout or an extension of the policy term to compensate for the missed payments.
Understanding these implications fully is crucial to ensure that taking a premium holiday won’t significantly derail your financial goals associated with the policy.
Always read the policy terms carefully or consult with a financial advisor to understand how a premium holiday could impact your endowment plan in both the short and long term.
#7. Insurance Coverage
While endowment plans primarily serve as savings and investment tools, they also include an element of insurance protection.
They usually come with minimally a death benefit, but some might come with permanent disability and/or terminal illness benefits.
Understanding the extent and limitations of this coverage is crucial in determining how an endowment plan fits into your overall financial and insurance strategy.
Recognise that the life insurance coverage provided by endowment plans is typically limited compared to standalone life insurance policies.
It’s meant to offer a safety net rather than comprehensive protection like what’s offered by life insurance policies.
Integrating with Overall Insurance Portfolio
Understanding the distinction between endowment insurance plans and pure life insurance products is crucial in shaping your financial and insurance strategy.
Endowment plans are essentially a blend of savings and insurance, primarily focusing on savings.
They are designed to accumulate a cash sum over a specific period, offering a payout at the end of the policy term, which can be used for various financial goals like retirement or funding education.
In contrast, whole life insurance primarily focuses on providing lifelong insurance coverage.
While it does accumulate cash value over time, this is more of a secondary benefit, with the primary goal being protection.
On the other hand, term life insurance is a non-participating plan, offering pure insurance protection without a savings component.
It provides coverage for a specified term and pays out only if the policyholder passes away during this term.
When considering your overall insurance portfolio, it’s important to strike a balance between protection, savings, and investment.
An endowment plan can be a valuable part of this mix, complementing your other insurance and financial products.
It can fill specific gaps, such as long-term savings for future goals, while your life insurance policies provide the necessary protection.
Our financial advisor partners, Zach and Xavier, recommend conducting a gap analysis of your insurance portfolio.
I shared how to find your life insurance gap in this post here.
But it’s best to engage a financial advisor to help you with this so you don’t miss out on anything.
Conclusion
Selecting the right endowment plan is a multifaceted decision, encompassing the alignment of the plan with your financial goals, understanding the nuances of policy terms, maturity benefits, and the balance between guaranteed and non-guaranteed returns.
Considering the plan’s flexibility, liquidity, and how it integrates with your overall insurance portfolio is crucial.
Given these plans’ long-term nature and complexity, every detail, from premium payment terms to the fine print, plays a significant role in ensuring the plan meets your long-term financial objectives.
It’s best to engage a financial advisor who can help you tailor a plan to suit your specific needs, avoiding potential pitfalls due to the long-term commitment involved.
