Savings plan is an important aspect for achieving a better quality of life. Whether the objective is to help you build up a nest egg, or to put money aside for your children’s education or to save for a rainy day or for a comfortable retirement, – careful savings means that you don’t have to worry about the future.
There two main types of savings plan. Almost all Insurance companies in general offer two distinct types of savings plans .
(1) Endowment
(2) Investment-linked Plans. (ILP’s).
In this article we will focus on the Endowment Plans
Endowment policies offer both insurance protection and cashback return. These are ideal only if you want to grow your savings over a fixed policy term, such as a period of 15 or 20 years. Typically endowment plans cover the Life Assured against Death and Total Permanent Disability and at the same time aim to have a return on the premium paid. In comparison to Term Life Policies (which are almost 100% protection oriented, thus having no return on Premium) these Endowment Plans offer a small and decent cover for life and at the same time provides a return.
There are a few specific characteristics in an endowment plan as given below.
- Maturity Period:Endowment plans will have a fixed maturity period. This is generally between five years to 20 years, depending on the type of plans that you buy. Usually, the maturity of your endowment plan should coincide with your targeted time line when you have aimed to have the cash in hand.
- Fixed Regular Premiums:Endowment plans typically require the regular payment of a fixed premium. Insurers usually offer the choice of paying for your premiums on a monthly, quarterly, semi-annually or annually. Alternatively, some insurers also provide plans that allows for the plan to be bought using a single premium (i.e. an one-time lump-sum payment).
- Insurance Coverage: Endowment plans usually comes with some insurance component. However it must be spelt out clearly, that in most cases, insurance coverage provided by endowment plans are usually insufficient, on its own, to adequately insure individuals. You should avoid thinking that your endowment plan is a suitable alternative to a life insurance plan. Where Life Insurance is the main objective, endowment plans may not be the only way to meet that.Typically the objective of buying an Endowment Plan can be one of the following; –
Education of the Children
The most common example in Singapore would be to plan towards a child’s education. Parents who buy an endowment plan will pay fixed regular premium. When the plan matures, the payout received can be used to fund a child’s college education, either in Singapore or overseas.
Saving
Many endowment Plans are bought with this as the goal. The term, “forced savings” is often the background for these. When you buy an endowment plan, you will be contributing a regular amount to the plan for a designated time period. For example, you may opt to contribute $3,000 a year to a plan for 10 years. Alternatively, there are also single premium plans, where you put in a lump sum amount at the start of the policy.
The length of your contributions may not necessarily be in tune with the maturity of your endowment plan. There are plans where the policy holder pays premiums for 10 years and be expected to hold the policy for another 10 years before it matures, giving it a total duration of 20 years.
An endowment plan is frequently used when a policyholder intends to save up money towards some specific financial goals. For example, a 45-year old person who wants to save up for retirement may choose to buy a 20-year plan that matures when the person turns 65. At that age the maturity Value will be paid and the policy will be terminated.
Endowment Plan As An Investment.
The main difference between an endowment plan and saving money in a bank account is the investment component of the plan.
The insurance company will use the premiums you contribute to invest in a range of financial products. The objective of this is to earn higher returns on the money.
A typical endowment plan would usually consist of a guaranteed and a non-guaranteed return. You must take note of this.
Guaranteed Return
The guaranteed portion of the policy is what the insurance company is obliged to return to you, regardless of how badly the investment portfolio has performed.
Typically, if the guaranteed portion is higher, it also translates into the insurance company taking lower risks in their investments. It is also extremely important at this juncture to note that the guaranteed portion of certain policies may be lower than the premiums you have been putting in.
Non-Guaranteed Returns
The non-guaranteed component of the policy is the additional returns you may receive if the portfolio performs well. The return rates that would be shown in the benefit illustration will be pegged at 3.25% and 4.75% respectively. This is standardised across the industry, as per the regulations of Monetary Authority of Singapore (MAS) .
These two numbers do not necessarily represent what the insurance company is aiming for or hopes to get. It simply shows how much you will get if the participating fund achieve 3.25% or 4.75%. That’s all.
Endowment Plan As Insurance…
Endowment plans may sometimes have an insurance component included. These plans would have a sum assured tag to the policy. This provides a payout in the event of death or
permanent disability to the policyholder.
Due to the fact that endowment plans are mainly for the purpose of long-term savings, relying on them to provide protection coverage would usually be an unreliable option.
As with all insurance policies, cost of coverage will differ depending on the age, gender and health related issues of a policyholder.
Endowment plans are useful only when the plans are kept alive till the maturity date. Early termination or early surrender will result in a loss to the Policy holder. Even surrendering closer to the maturity date may not be a worthwhile option. Real benefits are enjoyed only when the policies run the full term.
Girija Varadharajan
Great Eastern Life
HP 91852063
girijavaradharajan@gmail.com