Learning about financial tools can be a pain, especially when some financial terms (unfortunately) just have the connotations of being ‘difficult’ and ‘boring’. But, fret not as we are here to help!
What is an endowment plan?
An endowment plan is an insurance savings plan that helps one to save regularly, with life coverage over a period of time. This differs from regular investments such as trading stocks that do not provide any insurance coverage in the event of an investor’s demise.
Why do people buy endowment plans?
Be it to save for a child’s education, a holiday, or a milestone such as retirement – we all have our personal financial goals to achieve. There are several options to fulfill these goals, as well as helpful tools to help us along the way. An endowment plan is a popular financial tool for the following reasons:
If you are saving for an important life milestone i.e. wedding, wouldn’t you like to have guaranteed returns? Some endowment plans offer guaranteed returns , thereby posing minimal risks to your hard-earned money. Simply pay a lump sum or regular premium over a certain period, and you will be able to receive a lump sum upon policy maturity. This may include the guaranteed capital and returns (if any), depending on the policy features!
Easy saving regime
Traditionally, relationship managers in banks provide awareness on fixed deposits and endowment plans. Both of these products actually ‘force’ one to save (especially helpful if you are an obsessive spender!) because you’d be required to either put away an initial lump sum or a fixed amount regularly.
With technology advancement and the availability of more sophisticated financial tools, there is an increasing number of endowment plans being sold online, which may not be immediately accessible to the non-digital savvy.
How often have you heard this phrase: “Life is unpredictable”? That’s a universal truth, but life goes on too. That’s why it is important to plan ahead, and always have something to fall back on. While saving for a rainy day can help in times of emergency, it doesn’t hurt to have more protection. The life coverage for endowment plans may be minimal, but it will be handy (touch wood!) if things go wrong.
Things to note about endowment plans
Participating vs Non-participating
A participating endowment plan offers you a guaranteed sum and potential additional returns in the form of bonuses.
Here’s how it works: The premium that you pay is pooled with the premiums of other participating policies and invested in a special fund. The fund may possibly invest in bonds, stocks and other assets. You get to “participate” in the performance of the fund. This non-guaranteed returns is paid to you in the form of bonuses.
On the other hand, a non-participating endowment plan does not offer the bonus. Your returns will just be the guaranteed sum.
#TiqOurWord At first glance, the participating endowment plan may appear to be a better choice with the potential bonuses, but! Note that the guaranteed interest rate in a participating plan tends to be lower than that of a non-participating plan. To help you decide better, you’ll need to determine your risk appetite first. Don’t forget to review the credit ratings and past performances of the insurer too!
Also known as the rate of returns, this determines the amount that you will receive once your policy reaches the maturity period. And of course, the higher the rates, the higher the potential returns will be.
#TiqOurWord Don’t only look at the attractiveness of the interest rates. All aspects, including the maturity period and binding terms such as surrender charges, admin fees, and interest clawback should be considered.
Endowment plans come in various forms with different maturity period (tenure). As you may have guessed, the short to mid-term plans are more popular. With endowment plans that offer shorter tenure, that means lesser constraints and you can have access to your funds earlier.
How long are you willing to be committed to a policy? This is a question that you would need to ask as different tenure comes with different rates of returns. It may take a few years to a few decades for an insurance savings plan to mature. Insurers tend to offer better interest rates when you commit to a longer tenure but do note that, there are usually surrender charges or interest clawback in the event that you need to surrender your policy before the maturity period. Be mindful of the surrender value of your policy, which you can derive from your policy illustration.
#TiqOurWord ELASTIQ by Etiqa Insurance allows customers to top up or withdraw their funds after just 90 days and there’s no penalty and interest clawback!
Types of premium
Premium refers to money paid to purchase the policy. A single premium means that you are required to pay a one-time lump sum amount upfront while a regular premium means that you will be making a recurring payment over a period of time.
It is worthy to note that insurers sometimes offer upfront premium discounts for single premium policies, which means greater savings! On the other hand, regular premium generally comes with a set of binding terms, but could be more accessible for those who does not have sufficient cash for a lump sum payment.
Then, there’s the hybrid that offers the flexibility of both single and regular premiums. For example, ELASTIQ whole life insurance savings plan offers an initial single premium of S$5,000 – S$50,000, and allows policyholders to set a consistent monthly top-up from a minimum of S$500 to facilitate regular savings.
So, who should consider buying an endowment plan?
Have you been telling yourself that you need to save up only to feel poor at the end of each month? An endowment plan can be a great, fuss-free insurance savings option for obsessive spenders who require some form of discipline to save. #JustSaying
Prefer to play it safe? An endowment plan is a good financial tool , which can help to counter yearly inflation . For savvy investors, it is prudent to diversify your investment portfolio with different instruments too.
Any individuals who have short to long term financial goals can consider an endowment plan that provides a dual benefit of savings opportunities and life coverage. Instead of just saving your money passively, it would be wise to start considering ways to make the most out of your savings.
All information is correct as at the date of publication. This content is for reference only.