Commonly sold by both insurance agents and personal bankers, people in Singapore have varying degrees of understanding when it comes to endowment plans, sometimes, even after they have bought one.
Even among finance professionals, there may be a different understanding of what an endowment plan is, and isn’t. Some advisors may look at endowment plans as a type of “forced savings”. Others may think of it as a tool for investment, while some may see it as an insurance policy.
In this article, we will look at some of the pros and cons of an endowment plan.
As there are many different types of endowment plans in Singapore, all of which, offering its own advantages (and of course, disadvantages), do note that our article may be a generalised take on the category as a whole.
Also, any reference we make in this article to actual products is simply for the purpose of education, and in no way, representing our approval or disapproval of these products.
Let’s start with some of the pros.
Pros Of Endowment Plans
Pro #1 Guaranteed Returns
Compared to investing in the stock market, endowment plans generally come with some form of guaranteed returns. As long as you pay all the committed premiums and hold on to the policy till maturity, you will receive the guaranteed returns.
Here’s an example based on the AIA Smart Growth (II).
The illustration above is self-explanatory. The policyholder will have to commit to the annual premiums of $2,483.60 per year for 12 years, paying a total of $29,803.20. The policy matures after 21 years. If the policy is held till maturity, there is a guaranteed return of $35,000.
In other words, the minimum amount the policyholder will get is $35,000, regardless of the performance of the market.
If you were to invest on your own, there is no guarantee that you will be able earn additional returns, or even retain your principal. In extreme cases, you may even lose your entire principal.
Pro #2 Non-Guaranteed Returns
Non-guaranteed returns can be seen as both a pro and a con. For now, let’s look at it as a pro.
Compared to other instruments such as savings accounts and fixed deposits, endowment plans are able to generate higher, non-guaranteed returns for their policyholders. These non-guaranteed returns is dependent on the performance of the insurer’s participating fund.
For example, in the case of the AIA Smart Growth (II), policyholders will earn an additional return of $19,028, if the participating fund achieves a long-term annual return of 4.75%.
The ability to generate additional, non-guaranteed returns, makes an endowment plan more attractive than a regular fixed deposit. This is especially so if the guaranteed returns from the plan already provide a similar return to what fixed deposits would be giving. In some sense, it’s almost like getting the fixed deposit returns plus a “bonus” non-guaranteed return, subject to the performance of the insurer’s participating fund.
Pro #3 Some Insurance Coverage
Most endowment plans provide some form of insurance coverage as part of the overall benefit of the plan.
For example, Great Eastern provides a Flexi Endowment plan that offers coverage against death, terminal illness or permanent disability for the duration of the policy term. This provides some form of insurance coverage, on top of both the guaranteed and non-guaranteed benefits offered by the policy.
This is in contrast with regular investments that do not provide any insurance coverage in the event that a person passes on, even while they are investing for the future of someone important to them.
As such, endowment plans are popular among parents who would like to save and invest for their children’s education, since there is a guaranteed fixed amount given to their child, regardless of what happens in the future.
Cons Of Endowment Plans
Con #1 Guaranteed Return Does Not Equate To Guaranteed Principal
One misconception to avoid when buying an endowment plan is to be assuming that the premiums you pay for the policy would automatically be guaranteed, and that you will receive all of it back, plus some extra, when the policy matures.
This is not always true. And you need to understand this for yourself to avoid major disappointment in the future.
Here’s an example based on a Straits Times article.
Source: The Straits Times
From the benefit illustration above, you can see that while premiums paid to date is $200,378, the guaranteed return at maturity is only $189,000. This may not look too attractive for a person who buys an endowment plan hoping to get guarantee returns from it.
At the same time, the death benefit in the example above is substantial. If death occurs during the policy term, a payout of $189,000 is given. In a way, the lower guaranteed payout is somewhat balanced off by the fact that there is significant insurance coverage during the policy term.
At the end of the day however, you need to ask yourself what is the reason for buying an endowment plan in the first place.
Con #2 Long Commitment Period
Typically, most endowment plans tend to have a period of between 10 to 20 years where you have to stay committed to the plan. This means 1) making prompt payment on your premiums and 2) not surrendering the plan.
Penalty for early termination of your endowment plan can be very costly. If you surrender your policy within the first few years, you may even get nothing back from your policy.
In our view, if you are unsure of whether you will be able to commit to the entire duration of an endowment plan, you would be better off just using a savings account and to do your own investing.
Con #3 Actual Investment Returns Are Lower Than Long-Term Returns Earned
Lastly, you should remember that the projected investment returns earned by an insurer’s participating fund does not equate into the actual return that you will be getting from your endowment plan.
For example, in the case of the AIA Smart Growth (II) plan, if the participating fund achieve an investment return of 4.75% per annum, the actual return to policyholder is 3.85%.
Endowment plans offered by different insurers will have their own benefit illustration. For example, here is an illustration extracted from NTUC Income.
Source: NTUC Income
Long-Term Average Return: 4.75%
Actual Return To Policyholder: 2.99%
By now, we hope that you understand enough about endowment plans to know that this does not mean the AIA plan is better than the NTUC Income plan, just because the spread is smaller between achieved returns and actual returns.
Rather, the two policies are not identical and hence, a like-for-like comparison is not possible.
Our point here is that if you are intending to buy an endowment plan for investment purposes, you should know for yourself the difference between long-term average return achieved by the insurer, and the actual returns that you are going to get.
Otherwise, you might unknowingly be buying a product that is more insurance-based, rather than one which is investment-based.
Here are the pros and cons of an endowment plan which you should fully understand before you even consider a policy.
|There Are Guaranteed Returns
|Guaranteed Return Does Not Equate Into Guaranteed Principal
|There Is Also Additional, Non-Guaranteed Returns
|Long Commitment Period
|Some Insurance Coverage
|Actual Investment Returns Will Be Lower Than The Achieved Long Term Investment Return
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