With the various investment tools you can use to grow your money, an endowment plan is one of the lowest risk options for you to choose from.
This is if you get a policy that provides a 100% capital guarantee.
Apart from using endowment plans to invest, it also acts as a forced savings account, and the returns would minimally allow you to counteract the effects of inflation.
What is an Endowment Plan?
The simple definition is that it is a life insurance policy. Besides covering the policyholder’s life, it also helps them save regularly over the years.
The savings accrue to a lump sum amount that they can claim once the policy matures.
It differs from investments that do not offer any insurance coverage in the event of the investor’s death.
Endowment plans come to the rescue for various reasons. It could be saving for your child’s education, a vacation, or retirement.
They all add to our personal financial goals – be it short-term, medium-term, or long-term.
How Does it Work?
Before you decide on an endowment plan, you may want to familiarise yourself with the diverse ways it works.
Regular Premium Payment
An endowment plan requires you to make periodic payments throughout a period of time, unlike in the case of most investments and shares.
In the latter case, you usually need to pay a lump sum amount in the beginning.
The premiums you pay in endowment plans are generally a fixed amount each time. You might also have the chance to increase or lower your premiums as you make changes to your policy.
The payment frequency can be monthly, quarterly, biannually, or annually.
Pre-Determined Maturity Period
You need not look out for fluctuating market conditions in the case of an endowment plan. They typically last for a fixed time duration, anywhere between three to twenty years.
Your financial milestones should determine the maturity period of your plan.
For instance, if you are in your early twenties and planning for retirement in the years to come, a longer maturity period might suit your needs.
On the other hand, those who are older and seeking low-risk investment pre or post-retirement may opt for a shorter maturity period.
If your object is to buy a home or pay for your child’s college education, the maturity period will depend on when you need the payout.
An important point to note is that they are seldom appropriate for short-term financial objectives, which are 3 to 5 years.
It means if your goal is to save money for a couple of years, you may want to choose investments like fixed deposits or savings bonds instead.
That’s because they are of lower risks but comes at lower returns as well.
If you’re okay with taking slightly more risks, a short term endowment plan might be for you.
Payouts Upon Maturity
You will receive the returns of your investment only when your endowment plan reaches maturity.
However, the return amount will be left unknown to you before it’s time to claim.
That is because the performance of the participating funds determines your payout.
The insurer will quote a guaranteed return amount at the time of signing up. It’s the minimum payment you will receive when your plan matures.
It can be higher or lower than the sum of all the premiums you pay over the years.
There will also be a non-guaranteed portion where the returns you receive are not guaranteed. As with all investments, there are risks involved.
In case you are receiving returns lower than the sum of all the premiums, you are probably losing money.
Any amount over and above the guaranteed value entirely depends on the investment performance.
As endowment plans are meant to be a safer option, it is best to look for one that offers 100% capital guaranteed. This guarantees that you will receive all your investment back minimally and any non-guaranteed returns on top of it.
In Singapore, endowment plans usually come with a life insurance portion. And that is the reason why the companies selling endowment plans are mostly insurers.
This means endowments are a hybrid, similar to investment-linked policies. They cover both insurance and investment.
The premiums you pay will be split into both investment and insurance. If you choose higher insurance coverage, you will get lower returns when your plan matures.
The catch is that the insurance coverage is usually feeble to rely on entirely. Hence, if it is life insurance that you mainly need, you may want to sign up for a different plan to be more secure.
Participating vs. Non-Participating
A participating endowment plan usually offers a guaranteed sum and added non-guaranteed returns as a bonus. The premiums you pay are combined with premiums of other participating policies.
These premiums further go as an investment in a unit trust. The unit trust will then invest in bonds, stocks, and other assets.
This model makes you “participate” in the performance of the fund. In the end, you get the returns as non-guaranteed bonuses.
On the contrary, non-participating funds do not offer a bonus but only a guaranteed sum. So you have to decide whether you’re willing to risk some capital for higher returns or not.
The interest rate is essentially the rate of returns. It determines the amount that you will earn once your policy matures.
You will potentially receive higher returns with a higher interest rate.
Advantages of Endowment Plans
It’s clear by now that you will probably need to make premium payments at fixed intervals. And you probably foresee higher returns than the sum of your premiums when the plan matures.
Why would you particularly pick an endowment plan when other types of investments are available in the market? Here are some reasons why.
If you find the insurance package in an endowment plan convincing, that’s a good reason to sign up for one.
Indeed the insurance portion in endowment plans cannot wholly suffice. But if you already have an insurance policy in hand, the protection from an endowment plan can act as a bonus.
You must always have something to fall back on as life is unpredictable. Endowment plans may have minimal life coverage, but it will be handy if things go wrong.
After all, it doesn’t hurt to have more protection in place.
When you invest in more volatile types of investments like stocks and ETFs, it can be challenging to figure out the right time to claim your payouts.
However, when an endowment plan reaches maturity, you know for sure that you will receive your payout.
If you have set the maturity date for a specific financial milestone, say your child’s university fee, you need not worry about your investment locking your money.
You can also look for endowment policies that offer you regular payouts over a period of time as well.
They work similarly to annuity plans.
In fact, many endowment plans give you the freedom to surrender your investment in the event of a crisis. It may lead to confronting a huge loss, but it won’t be as tragic as not having your money when you need it.
If your risk appetite isn’t high and you do not want to incur an invariable loss, endowment plans could be the right choice.
They are generally low-risk investments. Even if your returns are lower than the sum of all the premiums you pay, your losses have a saturation point and are limited to a capped amount.
If you are saving for a specific event marking a milestone in your life, you would surely like to have guaranteed returns. The premiums you pay will eventually amount to a lump sum return once your plan matures.
Depending on the policy you pick, whatever you receive will include your capital and returns of the participating fund, if any.
A Disciplined Saving Regime
Endowment plans compel you to save as it requires you to put aside a fixed amount regularly. This regime is conducive if you are a spendthrift and saving money is a challenging task.
There is a rising number of endowment plans available online. All thanks to advancements in technology. You can obtain the plans instantly sitting at home.
Disadvantages of Endowment Plans
Before you sign up for an endowment plan, you must weigh the negatives along with the positives.
This analysis will help you understand the traits and make an informed decision.
Unneeded Insurance Coverage
Many agents mislead individuals to sign up, zeroing in on the investment prospects of endowment plans. You must know that a portion of your premiums makes up for the insurance coverage.
Thus, your returns on investment will not be optimal as it comes at the expense of the insurance.
If an investment is your priority, an endowment plan might not be suitable for you. In all fairness, the returns are negligible from only an investment viewpoint.
If you don’t need insurance coverage, it’s wiser to invest your money elsewhere.
The returns in endowment plans aren’t as high as you would like. As revealed earlier, the guaranteed returns may even be lower than the sum of all the premiums you pay.
Your insurer might sign you up in a participating fund where the returns will be lower than what you should earn. That is because a significant portion of your premiums goes towards insurance and fees to the insurance firm.
If you are financially savvy and can take risks to see higher returns, you can invest in ETFs or stocks. Otherwise, investment-linked policies can help you get higher returns than endowment plans if you’re not that savvy.
If you still want to add an endowment plan to your investment portfolio, some plans have higher guaranteed returns than others.
High-Commitment Maturity Period
Endowment plans can have a maturity period of up to 20 years. That’s a time too long to have your money tied up and an obligation to pay premiums.
If you think you will need cash sooner or urgently, you may want to count on more liquid investments. Alternatively, you can opt for short-term endowment plans.
Risk of Losing Money
If your insurer quotes the guaranteed returns to be lower than the sum of your premiums, you are certainly at the risk of losing your money.
To avoid loss, you can choose a capital-guaranteed endowment plan. Or you could invest in a fixed deposit or savings bonds.
Things to Note Before Buying an Endowment Plan
If you know the things you need, you will find your perfect endowment plan. Prepare a checklist to make a concrete decision with the help of the following.
Cost of Premium
The first thing you should regard is the premium cost. You should be able to afford the premium, especially with long-term endowment plans.
High premium costs may lead to lapses in the policy.
Also, you can check which type of premium is more suitable for you.
Do you want to pay a lump sum upfront amount? Or are you more comfortable making recurring payments?
You can also choose the hybrid type with both single and regular premiums.
Going for lump-sum premium payment is usually more rewarding due to lower transaction costs – if you have the cash upfront.
As mentioned a couple of times in this article, it’s best to look for endowment plans that guarantee you 100% of your capital back.
Because the objective of an endowment plan is to force you to save for a certain milestone, ensuring you have your capital gives you comfort that you can rely on it.
Guaranteed Returns Amount
What is an investment without higher returns, or at least one without losses?
Check to ensure the guaranteed returns are higher than the total premium amounts.
Additionally, you can check on non-guaranteed returns or bonuses and their structure in the plan. It’s recommended to not be bought into the non-guaranteed portion and only look at the guaranteed portions of an endowment plan.
Insurance Coverage Ratio
Buy an endowment plan only if you want to receive the insurance coverage part. Please go through the policy terms and know the coverage it offers.
You will most likely find that insurance coverage will not suffice on its own.
You might consider a term plan or a whole life plan for insurance instead.
The Surrender Policy
Check if there are penalties if you surrender. Are there consequences of surrendering the plan before the maturity date?
Some plans give guaranteed and non-guaranteed returns even if you surrender the policy.
We know by now that higher interest rates yield higher returns.
Participating endowment plans may seem a better choice as it comes with a potential bonus. But they tend to come with lower guaranteed interest rates than non-participating plans.
Assess your risk appetite to decide better.
Buy endowment policies from an insurance company with independent certification and financial strength. You could also review the credit ratings and performance history of the insurer.
Endowment plans with shorter policy terms let you earn your funds earlier with lesser restraints. Ask yourself how long you can commit yourself to a policy.
Different policy tenures have varying interest rates. Long term plans often come with better interest rates.
But they also carry a penalty or interest cut if you settle early.
Some insurers allow investors to top up or withdraw funds 90 days after sign-up with no penalty or interest claw-up.
Claim Settlement Process
It’s best to choose an endowment plan with a quick and easy claim process. Check if you can report the claims online, via SMS or email, or at branches and central offices.
Who Should Get Endowment Plans?
Are you an ideal candidate to sign up for an endowment plan? The following pointers will help you figure out if the shoes fit.
- Endowment plans are fitting for those who want a lump sum payment for specific long-term financial goals. Go for it if you wish to accrue regular savings before retirement.
- If you want to get tax benefits by saving moderate amounts over the long term, you should choose an endowment plan.
- This plan is ideal if you don’t have a high-risk appetite for investments. You need not worry about the changing market conditions with this plan.
- It is a good savings strategy if you are an overspender. Endowment plans force you to set aside a fixed amount at regular intervals, like it or not.
- It may not be sufficient as a standalone investment product, but you can add it to your investment portfolio.
- Your child’s university fees will possibly be relatively high. Endowment plans allow you to set the policy end date so that you can expect a certain amount upon maturity. It offers predictability and helps you plan strategically.
- An endowment plan is suitable if you have identified short to long-term financial objectives such as your wedding, housing, and renovations. You need the cash and can’t risk losing your capital. With an endowment plan, you can fight inflation with little risk involved if you choose a capital guaranteed policy.
Endowment plans should mainly cover three areas:
- It should protect and ensure financial security for loved ones.
- It should help you reach your financial goal.
- It should boost savings to meet investment goals over the long term.
Endowment plans are not tailor-made for everyone. They vary with different terms and traits to suit the various needs of people. Many people end up making the wrong investment choice with endowment plans.
That’s because they think endowment plans offer a high return potential. In actual reality, it’s not. It’s supposed to force you to save while helping you combat inflation with the guaranteed and non-guaranteed returns it offers.
It is necessary to learn every detail of an endowment plan to benefit from it. Avoid policies with complex features and benefits unless you have the financial acumen to comprehend them.
We have some articles compiling the various savings/endowment plans from the different insurers in Singapore. The list is not conclusive as we’re still working on them, but do check out the articles here:
You may also want to engage a financial advisor to guide you if you think you can’t figure it out on your own. There could be a catch in the fine print, and the financial jargon can baffle you.
Remember, the best endowment plan is one that addresses your specific needs. And you will recognise one if you will understand the entire package it offers in detail.