This article is written in collaboration with Etiqa. Views expressed in this article are the independent opinion of DollarsAndSense.sg
Along with investing and insurance, savings is an important component of any personal finance plan. If you are able to consistently save, then you would have enough money to plan for the future, rather than to continue living from paycheck-to-paycheck.
There are many ways to kickstart a habit of saving. A traditional way is to accumulate money in a savings account in a bank. Some people may also prefer opening separate savings accounts to differentiate between money meant for their daily expenses and money set aside for long-term savings.
Another method you can use to build up your savings is through the use of a savings plan. Typically sold by representatives of insurance companies, you may even have heard about a few such plans through insurance agents that you know.
In this article, we explain what a savings plan is, and how it’s different from other methods people typically use to build up their savings, such as savings accounts and fixed deposits.
What A Savings Plan Is…And Isn’t
You should not confuse a savings plan with a savings account. A savings plan is a financial product that you buy in order to grow your savings over a fixed period of time. A savings account, on the other hand, is a bank account where you keep excess money that you have.
Unlike a savings account, where you can withdraw at your discretion, a savings plan is more structured and requires you to commit to the plan that you bought for a fixed timeframe.
For example, if you commit to a 5-year savings plan, it means that your money would be locked up for five years. During this time, you would incur a penalty for early withdrawal. Think of this as similar to how a fixed deposit at a bank works.
At the same time, you shouldn’t confuse a savings plan with an investment plan. Investment plans such as investment-linked insurance policies (ILPs) are instruments where policyholders expect high returns for the risk they are taking (this risk includes complete loss of capital) investing their money. When it comes to a savings plan, your returns are usually lower, but you are also protected from the risk of losing your capital.
* Participating policies are insurance policies that provide both guaranteed and non-guaranteed benefits.
How A Savings Plan Works:
There are two main methods you can embark on a savings plan.
#1 Regular Premium Plans (Also Known As Regular Savings)
A regular premium plan requires you to contribute a certain amount of savings towards it each year. Here’s an example of how a savings plan, offered by Etiqa under its EASY save series, works.
Etiqa is the insurance arm of the Maybank Group and is rated A- by credit ratings agency, Fitch. It has been operating in Singapore since 1961. Most people may also know it as being the appointed insurer for their HDB fire insurance scheme.
The company also offers innovative products such its travel insurance policies, which provides real-time travel update pertaining to flight delays, and automatically allows customers to receive their travel delay benefits, without needing to manually submit a claim to the insurance company.
Product: eEASY savepro (Participating Policy)
Annual Premiums: $5,000 (over premium term of 4 years). This figure is used as an example. Premiums can be higher based on your savings preference.
Policy Term: 9 Years. For the eEASY savepro, policy term will mature five years after the annual premiums have been paid. For example, if you choose to pay annual premiums for four years, then the maturity of policy will be 5 years after that, or 9 years to be exact.
Total Premiums Paid: $20,000 ($5,000 for 4 years)
The eEASY savepro provides guaranteed capital protection on your premiums. It can also give a return of up to 4.02% per annum, depending on the performance of its participating fund.
Maturity Value:
Here’s a look at the benefit illustration.
Source: Etiqa – EASY save series
At the end of nine years, you will receive your $20,000 in paid premiums, which is guaranteed. If the investment return of the participating fund is 4.3% or no bonuses are cut, the total payout will increase to $25,493 (a total maturity yield of 3.28% p.a.). This is the projected portion of the policy.
Death Benefits:
In addition to the maturity value, the policy also pays out a death benefit of 105% of total premiums paid, throughout policy term, as well as the projected bonuses of the policy. Additionally, accidental death is provided at 100% of total premiums paid throughout premium term.
Source: Etiqa – EASY save series
Surrender Value:
It’s always advised for policyholders to hold their savings plan till maturity. Surrendering the policy early would lead to loss, something best avoided.
Source: Etiqa – EASY save series
#2 One-Time Lump Sum Premiums (Also Known As Lump-Sum Savings)
The other way to save will be to set aside a lump sum amount that you already have. This could be money you have already saved for a big-ticket item for the future. You may want your money to generate higher returns for you than to let it sit in the bank, but you may not want to take the risk of investing and losing it.
The eEASY savepro provides capital guaranteed protection while offering you the opportunity of earning better returns, depending on the performance of the participating fund.
Here’s an illustration of how a single premium (lump sum) savings plan works.
Product: eEASY savepro (Participating Fund)
Single Premium: $10,000
Policy Term: 6 Years (The lifespan of the policy is 6 years, deriving from 5 years after the premium payment for the first year)
Maturity Value:
Source: Etiqa – EASY save series
At the end of 6 years, the guaranteed payout from the savings plan will be your $10,000 capital. If the projected investment return is 4%, total payout will increase to $11,701.
Similarly, there is also a death benefit payout if the policyholder passes on during the policy term and you will also incur financial loss if the policy is surrendered prematurely.
Can I Get Guaranteed Returns Instead?
If you don’t like any uncertainty regarding your returns, you can opt for a savings plan that provides guaranteed returns instead. The EASYsave series offered by Etiqa also offers an eEASY save plan that provides a guaranteed return of 2.02% p.a., with a 2-year premium term over a 6-year plan. Here’s how the plan works.
1st Year Premium: $10,000
2nd Year Premium: $5,000 (Half of 1st year premium)
Total Premiums Paid: $15,000
Source: Etiqa – EASY save series
Interest rates provided by the eEASY save is guaranteed at 2.02% p.a.
Who Should Get A Savings Plan?
Savings plans, as its name suggests, is useful for those of us who need to save up towards an important goal with a specific time horizon. This includes future education, big-ticket items that we intend to buy in the future or even our retirement.
The savings plans that we choose should also be in line with our comfort levels. We can choose eEASY savepro, which provides guaranteed capital protection and a projected return. This is suitable for those who are willing to take on some investment risk, knowing that at the very least, they will receive the capital they put in.
On the other hand, individuals who are completely risk averse and want complete financial certainty on how much they will be receiving when a policy matures can opt for eEASY save.
Regardless of the plan you prefer, the important thing you should not lose sight of is that a savings plan requires commitment on your part. So be sure to understand the various pros and cons of each policy and the term period you have to commit to before buying it.
If you would like to find out more about the EASY save series offered by Etiqa, and whether it’s a product that makes sense for you, check out their website and get a quick online quotation for yourself today.
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