What are Endowment Plans?

I love this quote from Grant Cardone:

“If you don’t get serious about your money, you won’t have serious money.”

When I starting talking to clients, I often hear them say they would like to start saving more. When is the best time to save? The best time to save is NOW. The moment you start getting into the mentality of save first and spend later, you instinctively begin to want to grow your wealth. Even if you start small, you need to take that first step in being disciplined enough to stash away some of your hard-earned cash. We are ever so familiar with the phrase “save for a rainy day.” This is especially important as you need to ensure that you have an emergency fund when something unexpected arises!

Usually, when you think of savings, you think of banks, as that is the most common place where savings are held. However, given the low-interest climate, bank savings can only go so far as to get you “serious money”. In fact, your bank savings may actually be losing value due to the inflation rate being higher than the mediocre savings rate that banks actually give you. And often enough, whilst saving in the bank, you end up dipping into your savings for one reason or the other. Bank savings are great if you need liquidity, especially in the short term. You are able to access your savings at any time and use it.

To get “serious money” though, you would need to start investing in instruments that can give you a higher rate of interest. These can include different forms of investments including higher risk options like investing in the stock market or unit trust investments and investing in real estate or lower-risk alternatives such as investing in bonds and even endowment plans.

What are Endowment Plans?

Simply put, endowment plans are disciplined savings plans offered by insurance companies and banks. The people who benefit the most from an endowment plan are those who like setting aside a fixed amount for a specific financial goal and those who want higher returns than the bank savings rate but at the same time do not want to be exposed to too much risk and uncertainty. Although the features of specific plans differ from insurer to insurer, the following features are common amongst endowment plans.

Features of Endowment Plans:

1. Endowments have a regular savings amount The amount you save is usually fixed and you can pay it regularly either monthly, quarterly, semi-annually or annually. In some cases, insurers also allow for a single premium plan whereby the endowment is paid for using a lump sum.
   

2. Endowments have a fixed maturity period You are able to choose a fixed number of years you would like to save for. This can range anything from 3 years to even 30 years! The maturity of the plan should coincide with your saving goals such as retirement, your child’s education planning or even a financial objective such as purchasing a home. In doing so, when the time comes for a financial goal to be realised, you do not have to liquidate your investments especially if you have to do so at a loss given bad market conditions at the time you want to do so.
   

3. Endowments have an insurance component Usually, endowments have an insurance component in the form of a death benefit. This means that in the duration of the plan, should death occur, your family will receive a pay-out which is usually higher than the amount that you have contributed in the given time. The insurance amounts in endowments tend to be low though so do not utilise these plans solely for the idea of coverage.
   

4. Endowments have a guaranteed and non-guaranteed component. Most endowment plans come with a guaranteed and non-guaranteed component. This means that as long as you continue to pay your premiums and hold the plan to maturity, the guaranteed component will be paid out. However, it is not always the case that the guaranteed component pays out the total amount invested. In some cases, the guaranteed component can pay out lesser than what was put in. It truly depends on the plans purchased so you need to be sure about this aspect to avoid disappointment in the future. But it is good to note that there is at least a guarantee of a sum of money with an endowment plan. The non-guaranteed return is dependent on the performance of the insurer’s participating fund. Insurers will usually put the projected returns in the form of a table in the benefit illustration given to the policyholder. Do remember that the projected investment returns do not always equate to the actual return earned on your plan. However, these non-guaranteed returns can end up being higher in interest than what your bank savings would provide.
   

Uses of Endowment Plans:

1. Child’s Education Most of my clients who are parents, want to be able to set aside funds to finance their children’s tertiary education. With education inflation on the rise, university funding be it locally or overseas can be daunting. Starting an endowment early and coinciding with the maturity date with when the child enters university can help fray the costs of putting your child through university. In my experience, most people who choose to take up endowment policies do so because they have a rough idea of how much the pay-out will be at maturity. For example, one client sets aside $300 monthly for a potential lump sum of $100,000 after 20 years of saving. Knowing that there is at least $100,000 for education funding for her child sets her mind at peace. Most insurers also allow parents the option to add on riders which waive off premiums if the policyholder passes on or even if they suffer from a later stage of a critical illness. This assurance allows for parents to have peace of mind knowing that their dreams of seeing their children through university can still be realised even if they are no longer around.
   

2. Retirement Whenever I ask my clients “when do you want to retire?” the common answer is “tomorrow!” As much as we would like to stop working and enjoy retirement early, the cost of living in Singapore is high. You can only retire once you can be sure that your financial needs upon retirement can be taken cared of. These will include paying off your mortgage, having sufficient funds to pay your insurance premiums (especially important for hospital plans!), living expenses for the type of retirement you would like (travels, fine dining, owning a car, gifts for your loved ones etc) and so on. You can use an endowment plan as a diversification tool to supplement your retirement nest. This is because, over the course of your working life, you might also choose investments with higher risk. However, an endowment can allow you to still take on higher risk but having the security of a pay-out when you need it. These days, you can also tailor endowments to allow for your money to be disbursed in the manner you prefer (either one lump sum at a certain age or a stream of income over a few years or a combination of both!) I have clients now opting for a combination of a lump sum payment at a certain age coupled with a stream of income for several years. This option works well for them as they feel that they are able to at least enjoy the fruits of their labour by receiving a pay-out at retirement and also ensure that they have their basic needs met with a stream of income coming to them post-retirement. This is truly the best of both worlds but requires you to set aside more funds for retirement.
   

3. To counter excessive spending

During the lockdown, online sales surged as people could not shop or even travel as they chose to. This led to impulsive purchases that would otherwise have not occurred or taken a longer period of consideration before the purchase. It is not wrong to spend especially if you are working so hard to earn your keep. But, spend after you have taken some aside to save. I get many clients coming to me saying they just want to start a savings plan because that would make the purchases feel less guilty! Savings never hurt anyone so if it takes this form of disciplined saving to get you started in the first place, I say go for it!

Types of Endowment Plans:

1. Classic Endowments With these plans, your savings amount is constant and the number of years you save is fixed. Upon the maturity of the plan, you receive a lump sum pay-out which comprises a guaranteed and non-guaranteed portion. Usually, the longer the duration, the higher the interest rate earned. This is especially so since you are not able to touch the money till maturity (early termination of plans will result in a financial loss) Pro Tip: Opt for a shorter saving term rather than saving for the whole of the plan’s duration. For example, for a plan where the maturity is in 20 years, you will end up having a slightly higher interest in opting for paying for 15 years (or lesser) and then receiving the maturity pay-out as opposed to saving for the whole 20-year duration.
   

2. Cashback Endowments These plans also allow for the savings amount to be constant and a known number of years of savings. But, the main feature of this type of endowments is liquidity. Usually, after a duration of time, the plan provides a cashback option annually where you can receive a sum of money back. Do note that the provision for liquidity causes a reduction in your savings interest rate. Pro Tip: If you do choose this option, make sure to not touch the withdrawals if you do not need them. In doing so, you would allow for the cashback amount to be reinvested with a slightly higher interest rate. That pot would also end up being liquid if you need to dip into it in some years to come.
   

3. Financial Goal Specific Endowments Often, insurers end up packaging Education Endowment Plans or Retirement Endowment Plans whereby the features are common to what most people want in such plans. Education plans could have yearly pay-outs for the duration of the child’s university years so that expenses during university can be met on a yearly basis. Retirement plans could provide a lump sum option combined with yearly income streams till a certain age which you can choose ahead of time.

Considerations about Endowment Plans:

1. Be sure that you do not require the money in the short term as early termination will cause you to suffer a financial loss.
   

2. Endowment plans are lower-risk investments thus the returns are lower as compared to if you were to invest. Do not start an endowment plan and then years later question why the interest rate is so low in comparison to say stocks or unit trusts.
   

3. The amount that you set aside should be comfortable for your current cashflow and take into consideration future expenses that may arise. Though you are able to decrease your contribution for endowment plans, doing so may affect your returns. So only set aside an amount that you know you can contribute consistently for the duration of the plan.
   

4. At the end of the day, any form of savings is good. If the above points resonate with you, then an endowment might be the way to go. Else, look for tools that could help you potentially earn a higher rate of interest than what the bank offers. But, if you do not even have savings in the bank, that might just be the place to start first! Remember, save first and spend later!

I hope this helps you have more in-depth knowledge about endowment plans. If you have any further questions, you can send me a message in the contact box below or email me at agentmamasg@gmail.com. Be well! 😊