Endowment policy
We have heard of savings endowment plan one way or another from a close friend, relative, personal banker or even from an insurance agent that approaches you in a shopping mall. But how exactly does it fit your individual financial needs? Could it be you are expecting a newborn child and wish to save towards an education plan for future child needs? Hoping to start a small business and requiring capital outlay in the future? Looking forward to retirement? Or just wanting to save up a lump sum of money for whatever comes next?
Endowment policy can potentially cater for such needs with different features such as cash withdrawal, lump sum payout when illness strikes or even a piece of mind knowing the policy is paid for and an amount of cash is available for the intended recipient when with the demise of the policy holder.
How is it different from saving in my current bank Step-Up Savings account?
While most basic bank account in Singapore start with a base interest of 0.05%p.a to 0.2%p.a, the newer step-up interest account typically offers bonus rates up to 3%p.a. However the terms and condition imposed usually requires a certain minimal credit card spending, crediting of salary, taking up investment products, incremental top-up and other requirement as stated. Not to mention, there usually exist a maximum cap or amount within the bank account that is entitled to the step-up rate. Not meeting any of those conditions could mean a reduced rate of interest or failing to receive the said bonus interest.
Endowment policy also known as insurance saving plan on the other hand, usually have a fixed regular premium to be paid over a number of years in exchange for an amount of capital returns and relevant insurance coverage on the policy holder.
What are the key features of an Endowment Policy?
When planning to take up an Endowment policy, do consider short and mid-term financial needs as well as the purpose of taking up the policy. If financial liquidity a potential issue, an endowment policy with withdrawal feature should be considered. If the endowment is for children education, riders that ensure the policy payout out a certain amount of fund upon its intended maturity should be included. If short term critical illness or disability coverage is insufficient in your current insurance portfolio, such rider can usually be included to ensure the endowment policy is catered to your personal need.
Due to having a large number of optional riders, an Endowment policy can be used to cover lacking need in an individual portfolio. However, selecting the relevant riders for the endowment policy based on personal needs is important as excessive riders will reduce the payout of the policy upon maturity. Most Endowment policy are also participating policies, meaning that the benefits received at the maturity or surrendering of the policy may be based on fund performance of the insurer.
Do note that upon maturity of the endowment policy, any attached health riders are also terminated.
Is an Endowment Policy suitable for me?
Endowment saving policy may be good for those looking to force a saving habit or not wishing to seek risk. Payouts usually are higher as compare to Saving Account or Fixed Deposit. Such products are usually suitable for mid-term financial goal with some allowing for withdrawal during the early years of the policy itself. Riders can be added such that an intended amounted to achieve will always be realized no matter what happen to the policy holder.
Example: Saving up 80k for children education over the next 15 years. The sum assured ensure that the funds will be available even if any mishap occurs.
What are some of the key terms I should look out for?
Coverage period: As stated in the policy proposed to you. Typical terms are 5, 10, 12, 15, 20, 25 or 30 years. Other tenures may also be available, depending on the product feature itself.
Premium: Must be paid for a fixed number of years or throughout the whole period of the endowment policy.
Cash Value: Lump sum payout generated upon maturity or surrendering of product. Payout may consist of a combination of guaranteed and non-guaranteed benefits. Certain products may allow for partial withdrawal during the tenor of the product.
Sum Assured: A pre-determined amount that will be payout should the insured event take place.
Maturity Value: Payout typically consists of guaranteed and non-guaranteed cash value. A policy with a higher guaranteed maturity cash value than total premium paid would means you will minimally receive a higher amount than the total cash paid till maturity. The non-guaranteed maturity cash value is based on the performance of the investment by the insurer.
Surrender value: Surrendering an insurance policy is generally not recommended and only to be considered in the direst of needs. The payout value is based on the number of years the policy is enforced and payout is usually lower than total premium paid till date.
Withdrawal: Certain policy may allow for partial withdrawal of the accumulated cash value, however the maturity value may end up being lower as lesser returns are being generated with cash withdrawn.
Guaranteed: Refers to the minimal insurance or cash value that the beneficiary of the policy holder is entitled to, in the event of Death, Total Permanent Disability, Critical illness and/or any other insurable event.
Non-guaranteed: Premium collected from policy holders are pooled and invested by the insurer. Besides investment returns generated, the non-guaranteed cash value is also affected by claims and lapse experience. Upon bonus declaration which is done on a yearly basis, it forms part of the guaranteed benefit of the policy.
Riders: Riders are additional benefits that can be added on to a policy which provide additional coverage for a premium. Riders benefit defers from individual insurer and policies and cannot be brought as standalone product.
Premium: An amount paid by policy holder for the insurance policy. Payment method can be monthly, quarterly, semi-yearly, yearly or as a lump sum.
What else should I take note of when considering an Endowment Policy?
Returns may be lower compared to investing the accumulated fund in investment products. Insurance coverage terminates upon maturity leaving policy owner with a shortfall or lacking insurance coverage. Coverage amount may be lower than other types of policies as the focus is geared towards total returns.
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