Is Endowment Plan Good Despite Many Options?
Is endowment plan good and is still relevant today especially when you are investing for the long term? Since there are many financial instruments that have been introduced and made available to the public market over the last few years, it makes us understand if endowment plans are still relevant or not in nowadays world.
In 2020 alone, the total assets of the top 50 insurers from Singapore gained $313 billion (that’s $313,000,000,000 new assets in a single year!). While this amount of assets sounds huge, what makes it more promising is that those amounts of assets is already a 17.22% increase from $267b in 2019.
What is an endowment plan?
Endowment insurance policies are a form of insurance that provide both savings and protection. The policy builds up a cash pool over the years, which when cashed-in, many products now guarantees to pay out more than was originally invested.
However, unlike deposits where you get your money back after you make your initial investment, part of your premium goes towards paying for the small insurance coverage and distribution costs while the rest is invested and becomes subject to the performance of the participating funds.
How does endowment plan work?
On top of the savings element, an endowment policy also protects you against death or total permanent disability (TPD). In other words, if you die or TPD before your policy matures, your beneficiaries will receive either a lump sum payout or monthly income until maturity.
The amount you receive from the insurer depends on how much you have paid in premiums. Normally, the larger the amount of premiums paid in and longer time duration (i.e. greater number of years) contributes to an increase in cash value/savings amount payable upon TPD/death.
Good Reasons For Choosing Endowment Plan
When it comes to investments in the market, endowment plan are not quite as popular as other options, such as unit trusts or a fixed deposits. But that doesn’t mean an endowment plan is not worth considering. Let’s take a look at its benefits and then move on to understanding how it works.
1. Education Planning
The most common reason for purchasing an endowment plan is to provide for education savings needs in the future. In Singapore, even the most basic education requires a substantial outlay.
The good thing about endowment plans is that they are flexible enough to cater to your needs. You can take out a policy that suits your budget and choose a payout period that matches your child’s education timeline.
2. Retirement Planning
Yes— Retirement planning is not just about accumulating enough money over the years but also ensuring a steady stream of income after retirement.
This is where a regular payout from an endowment plan can help to supplement your retirement income needs. Such plans also provide flexibility when it comes to withdrawing your money as you can either take out the lump sum or receive regular payouts from it if you have chosen one with such an option.
3. Wealth Accumulation / Protection for Family Members
Many people choose endowment plans because they want to accumulate their wealth while enjoying some form of protection as well.
The main objective of it is to provide financial protection for your family members in the event of any unforeseen circumstances. In the event of a death or disability, you may be unable to continue working to support your family and pay for their expenses.
The proceeds from endowment plans can help to replace the loss of income and pay for any outstanding debts that you may have accumulated. You can also use the money to fund important expenses such as your child’s education and marriage. The payout from endowment plans also helps to provide liquidity during times of financial need.
4. Bequests / Inheritance Planning
You can choose to purchase an endowment plan for many reasons, but most of these reasons can be split into two main categories: Bequests and Inheritance Planning.
Most people purchase an endowment plan with the intention of leaving behind a bequest or inheritance for their loved ones.
Some examples of bequests are:
- A lump sum of money to leave behind after death
- An amount of money at specific points in time (e.g., when a child turns 21)
- A monthly income stream to help support survivors after death
The second reason is that an endowment policy can also serve as an inheritance planning tool. A will is usually drafted with the intention of dividing one’s assets to the desired beneficiaries. This can include the transfer of properties, bank accounts and shares among others. Many people may not be aware that life insurance policies can also be transferred under a will.
Endowment Plan : Pros and Cons
Pros
- Guarantee of Capital. If you surrender your Endowment Plan before it matures, many of the policies will guarantee you will receive at least your premiums back with bonuses added.
- Low Risk. The returns on an endowment plan are not high (only 2-4% per annum), but at least it is partially guaranteed. This makes it a low-risk investment that is suitable for those who want to put their savings into a safe investment.
Cons
1. Low Potential Returns compared to equity markets: Endowment plans are basically a mix of life insurance and investment. The returns from endowment plan are usually not super attractive and hence, it is not recommended for those looking for higher returns. Usually, the returns from an endowment plan will be around 3.0% – 4.0% per annum and part of this return are guaranteed by the insurance company. Endowment plans offer higher returns than bank deposits but lower returns than other investment products.
2. High Costs and Commission (especially older policies): As the endowment plan has a guaranteed return, the insurance company needs to charge extra costs to make money from providing you with this guarantee. The older policies have higher charges as compared to newer policies due to the different rules when it was sold. In addition to that, there would be commissions charged on an endowment plan as well. This can eat into your returns for the endowment plan, making them much lower than what you expect.
So, Why choose an endowment plan?
Like any other insurance policy, it is important to choose an endowment plan for the right reasons. Choosing an endowment plan solely for the returns offered is not recommended, as you may be disappointed.
There are other reasons why you might consider investing in one:
1. To save for a specific goal that is at least 5-10 years away. This could be your child’s education or a down payment on a property.
2. If you are already maxing out your CPF and have no excess funds to invest in stocks or unit trusts on your own, then an endowment plan may be considered. This way, you can also receive life insurance coverage at the same time.
3. If you prefer not to take the risk of investing in the stock market and prefer to have a guaranteed return component on your investment, then this is another good reason to buy an endowment plan.
Endowment plan is convenient for people who know nothing about investment.
Singaporeans may find endowment plans conveniently because it’s a one-stop solution for people who don’t have time or expertise to invest. You pay premiums to an insurer and the money is invested by them on your behalf. The funds are usually invested in bonds and equities.
Besides that, endowment plans are also relevant for people who have financial goals to achieve in a specific period of time.
There may be people who have financial goals and need to achieve them by a certain deadline. These deadlines may be a child education fund or retirement. It could also be because they want to cater for the regular annual expense (such as angpow monies or overseas vacation) via a disciplined savings instrument.
For these people, simple savings accounts or fixed deposits may not provide the returns needed to achieve these financial goals. In such cases, endowment plans may be considered as they can potentially provide higher returns than simple savings accounts or fixed deposits over the long term.
Managing risk is another reason why endowment plans are relevant as they are diversified and not as risky as traditional investment instruments like stocks.
Endowment plans usually do not require you to take an active role in managing your money. They will do all the work for you and all you need to do is pay your premium and collect the benefits when it matures. This is important for people who do not have much time or knowledge about managing their finances by themselves.
Endowment plan’s returns are steady, unlike UTFs which have up and down periods.
The returns are steady, unlike Unit Trust Funds (UTFs) which have up and down periods.
The returns are comparable or can be even better than policies that invest in UTFs.
It has a fixed premium and cash value over the long term, which is an advantage for some people.
Some plans have a guaranteed surrender value, which means you can get back a certain amount of the premiums paid if you terminate the plan early. This is an important feature to look out for if you want to be able to withdraw your funds earlier rather than later.
You have the option to choose between a single or regular premium payment plan. The policy buyer is protected from mis-selling by financial advisers since there is a MAS Balanced Scorecard (BSC) Framework.
Takeaway:
Although the performance of an endowment plan will never match that of most other investments, it is still a good option for many people who want a low-risk way to invest their money and get some protection in case they die unexpectedly or suffer a disability that seriously limits their ability to earn an income. This is because the value of endowment plan might still beat inflation alongside other investment options such as unit trust funds, ETFs, and so on.
We offer a variety of endowment plans, which are designed to meet a specific need, goal or objective.
