Saving for your wedding?
Planning a big vacation for your 30th birthday?
Concerned about rising education costs for when your children go to university?
Saving for the future is a goal that many Singaporeans have, yet many still stick to the basic method of putting their savings in a bank account.
Here’s another financial instrument that can help you reach your financial goals: an endowment plan.
Endowment plans sometimes get a bad reputation, being known as “forced savings”. However, if used in the right way, they can be a useful part of a bigger overall financial plan.
In this article, we discuss how you can use an endowment plan to meet your financial goals.
5 Ways An Endowment Plan Can Play a Key Role In Your Financial Portfolio
1. Saving for Both the Short and Long Term
Whether you have a short-term goal such as saving to purchase your first home or planning for your wedding or a long-term one like accumulating a nest egg, an endowment plan can be helpful.
Both single premium and regular premium endowment plans can help boost your savings by providing higher returns than a normal savings or fixed deposit account. The fixed tenure of an endowment plan ensures that you will have the amount of money you need when the policy matures.
An endowment plan can be particularly useful if you have a specific financial goal that you’d like to achieve within a particular time frame.
Maybe you’d like to save $20,000 for your wedding that will be happening in 3 years’ time. Or perhaps you’d like to completely renovate your home in 5 years and need $80,000 to do it.
Having an endowment plan is great for goal-based savings as it’ll automate the savings process and you know exactly how much you get at the end of the policy.
Suggested reading: 4 Small Mindset Changes That Can Help You Up Your Savings Game
2. Saving for Your Children’s Education or Future Financial Needs
Endowment plans are a popular choice with parents who want both savings and insurance coverage in one plan.
With the costs of higher education rising year by year, purchasing an endowment plan for your child can be a good way to provide them with a financial head start when they enter university.
If you have an endowment plan, when the policy matures, you’ll receive a lump-sum amount that can be put towards your children’s education or other needs.
Additionally, if anything unfortunate, such as permanent disability or death, happens to the parent policyholder during the lifespan of the policy, the beneficiaries will receive a financial payout.
This dual function of an endowment plan gives parents peace of mind that their children will be taken care of financially, no matter what happens.
3. Preparing for Retirement
Regardless of your age, it’s never too early (or too late!) to start planning for your retirement.
An endowment plan, with the options for different tenures and maturation periods, can offer a suitable financial vehicle for building up your funds just in time for retirement.
With an endowment plan, you can coincide the maturation period with your expected retirement age to ensure that you are financially ready when the time comes.
There are some endowment plans that are structured to provide monthly payouts instead of a lump-sum payment when the policy matures. This option may be most suitable for those who intend to use endowment plans as part of their retirement planning.
4. Supplementing Your Other Life Insurance Policies
One benefit that an endowment plan offers over a savings or fixed deposit account is that it also provides life insurance coverage.
As such, an endowment plan can be used to supplement your other life insurance policies while helping you save money at the same time. So, if you’re calculating your life insurance needs, you may want to consider if an endowment policy can be part of your portfolio.
Suggested reading: 3 Mistaken Beliefs Stopping You From Buying Life Insurance
5. Creating a More Balanced Investment Portfolio
Endowment policies are often merely considered a way to automate savings but they can also help rebalance your investment portfolio, when necessary.
How? Endowment plans, by their very nature, are less risky than investment options such as stocks or even investment-linked insurance policies. This is because endowment plans offer a certain amount of guaranteed returns to the policyholder, regardless of how the market performs during the tenure of the plan.
For instance, an endowment plan could be helpful for an investor who is reaching retirement age and wishes to transition from a high-risk portfolio to something that will help him protect his funds.
Who Should Consider Having An Endowment Plan?
If you have a financial goal, be it a short-term or a long-term one, an endowment plan could be a good option. Like all financial and insurance products, what fits best will depend on your current financial situation, future goals as well as other factors such as risk appetite, lifestyle needs and budget.
Generally speaking, endowment plans are an excellent option if you’d like a more disciplined and structured approach to savings. They may also be a good choice if you have a low-risk appetite or if you need a specific lump-sum of money at a specific time.
Endowment plans can provide you with a sense of security and peace of mind as they are typically low risk, particularly in comparison to other investment vehicles.
While this usually means that endowment policies earn lower returns compared to high-risk investment options, funds that are placed in an endowment typically do generate higher returns than those in a basic savings account.
In this sense, it’s an acceptable trade-off for individuals who do not want to take on additional financial risk yet still want their money for work harder for them.
Questions to Ask When Considering an Endowment Plan
With so many endowment plans available in the Singapore market today, it’s important to know what you’re committing to before you buy an endowment plan.
Here are three key questions you should ask when considering an endowment plan.
1. “What is the premium payment period?”
Premium payments for endowment plans are structured in two ways: a single premium lump-sum paid at the start of the policy, or a fixed premium paid regularly for a specified period of time.
This is an important question to ask because it affects your level of financial commitment to the plan.
Typically, a single premium endowment plan will require a minimum savings amount of $1,000 and the maximum is decided by the insurer itself (different companies will have different limits).
With a single premium lump-sum amount, a key point is that you will not have access to these funds until the plan matures. As such, it should be an amount that you are comfortable putting away and not touching during the entire tenure of the plan.
The financial commitment for a regular fixed premium will be different. Endowment plans with regular premium payments have a less upfront financial impact but requires an ongoing commitment.
Such a payment structure would be most suitable for individuals with a steady income who are confident about meeting this payment obligation. Another crucial piece of information is how long you’ll have to pay the regular premiums.
You may like: 5 Questions To Ask Your Financial Advisor Every Quarter
2. “When does the policy mature?”
In some cases, the length of time you pay regular premiums may not coincide with the maturation date of the endowment plan.
For instance, the plan could be structured in such a way that you pay regular premiums for 5 years and the policy matures 5 years later – making the total duration of the endowment plan 10 years.
This information is important as you need to know how long you have to hold the policy before you have access to your funds again.
On a related note, it is also important to know the consequences of surrendering the endowment plan before it matures.
3. “What is the amount of guaranteed returns?”
Naturally, when it comes to a savings instrument, we all want to receive our initial capital investment plus a little bit extra (be it interest, dividends, or some kind of returns).
Endowment plans often consist of both guaranteed and non-guaranteed returns. The figures for the non-guaranteed portion are usually projections and are not indicative of what you will actually receive at the end of the policy. It will, after all, depend on market performance.
Suggested reading: Smart Beta Investing: What Is It And Why It Matters?
Therefore, before committing to an endowment plan, we recommend finding out what the guaranteed returns of the plan are, as that’s the amount that you will definitely receive at the end of the policy’s life.
Ideally, you should receive a guaranteed payout that is more than the total amount you’ve contributed when your endowment policy matures.
What are your financial goals and can an endowment plan help? Share with us in the comments below.
You may also like:
- The 101 on Education Endowment Plans for Your Child
- D.I.Y vs Financial Advisors: Which is Better?
- Marriage and Money: Getting Financially Organized with Your Other Half