The Truth About Savings Plan (Endowment)

Back in 2017, there was a sensational news in social media that a person bought a savings plan twenty years ago. He claimed that he was supposed to get $40,000+ back for his savings. However the amount that he gotten is only $20,000+. It was circulated online and caused fear and confusion and spiked a huge debate online. Recently it was brought into attention again. And there are lessons to be learnt and shared.

What exactly is an endowment savings plan? It is a type of life insurance that offers minimal coverage. It is a participating plan and will accumulate cash value. It is generally seen as a disciplined way to save and are typically used to help achieve financial goals. Here are some of the features, benefits, and limitations of an endowment savings plan.

There are guaranteed and non guaranteed portions

The first thing that comes to most people mind: is it guaranteed?

There may be the misconception that the returns of an endowment plan is guaranteed, this is not necessarily so.

There are the guaranteed and non guaranteed portions.

The benefit illustration of an endowment plan will show a projected investment return of 3% to 5%. And the actual amount received will be subjected to the performance of the insurer's investment.

The good news is that once the bonus is declared, then it is guaranteed.

And you can look into the company's track record for the past participating bonus. And generally it falls within the projected range.

And usually the capital is guaranteed at maturity or after a period of 15 - 20 years, as it will reach the breakeven point where the guaranteed surrender amount is higher than the total amount of premiums paid.

There is long commitment period

Endowment plan is typically used to meet our mid to long term financial goals.

The lock in period is typically between 10 to 30 years.

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.

While the long commitment period may be a turn off for some people, we can have a change in mindset and view it as a discipline way to save our money. Especially for those people who tend to spend everything away and leave nothing behind at the end of every month. At the end of the day, you may be grateful that you have this savings plan to help you accumulate your money.

However if you are unsure of whether you will be able to commit to the entire duration of an endowment plan, we can explore other options in the market for you to offer more flexibility and can customize to suit your needs and wants.

For those who are already stuck in an endowment plan and need cash urgently, there are companies who can buy over your plan at a slightly higher rate than your current surrender value.

For those who need cash on hand within the next few years, they are also better off having cash in the bank or fixed deposits or limited tranches structured deposits with shorter term.

There is limited flexibility

As mentioned in the previous point, the lock in period for an endowment plan is typically between 10 to 30 years.

While you can terminate your plan before maturity, doing so can be costly and is not advisable. Should you terminate your plan before maturity, you would then lose a portion of the premiums that you have paid to date. Therefore, to reap the full returns of the endowment, you are required to commit to the policy term and hold the endowment plan until maturity.

Traditionally, there are only savings plans with fixed period and fixed maturity. Nowadays, to suit the needs and wants of customers, insurance companies have come up with more varieties of savings plan to target different audience and crowd.

Two of the more popular types of savings plan:

Coupon payout - This type of savings plan offers coupon payout on a regular basis until maturity. Individuals may also choose to take out the payouts to use for their leisure, holidays, expenses, etc. or to accumulate their payouts with the insurer for additional interest so as to receive a larger sum at policy maturity.

No Fixed Maturity - This type of savings plan can last a lifetime. Individuals save for a fixed period, for e.g. 5 years, 10 years, 15 years or 20 years, and then they can accumulate the savings for as long as they want. They can hold until when they need the money, then they withdraw the plan, or better still, they can even hand over to the next generation as a gift of life.

There are insurance components

As the savings plan is from an insurance company, there is bound to have insurance component in it. Although it may be minimal, there may still have the cost of insurance.

There are also options to add riders to the endowment plan. Some people like the idea of adding riders to waive off the premium. So that in the event of anything unfortunate happen, the savings plan will still continue on, without them having to continue saving every month, since the insurance company is now paying for it in a way. But do take note that these riders have no value and may even eat into your savings plan. For the 2017 incident, it happens to be the case, where half of the savings go into the insurance component. And that is why the savings payout they received is lesser than the amount they had saved over the year.

While endowment plan may be an insurance product, it provides minimal protection coverage. Therefore, I personally do not recommend using any savings plans for protection planning. I will advise separating our insurance and investment, and do up a comprehensive and holistic portfolio, so you will have a clear picture of where your money goes into.

There are no bad products, only not so good recommendation. Endowment savings plan has its pros and cons, and may be suitable for certain groups of people, and for certain duration and period of your life.

To determine whether a product is suitable for you, we have to look deeper into our purpose, our priorities, and our risk profile. If you are interested in getting a savings plan, or would like a second opinion to find out what plans can best suit your financial goals, contact me for a complimentary consultation now.