Investing isn’t something that’s reserved for rich people. In Singapore, investing is essential to financial health. Endowment plans are a fairly common type of product that Singaporeans often buy for investment purposes. There are a variety of endowment plans, including the infamous investment-linked insurance.
The various types can be so different that it’s impossible to compare them apple-to-apple. That’s why you need to know what you want out of an endowment plan before you know what type to buy.
Before you make an informed comparison of the various types of endowment plans, you should never blindly buy one just because it was recommended to you by an agent!
- What is an endowment plan?
- Reasons why Singaporeans get endowment plans
- Why should you sign up for an endowment plan?
- Why should you not sign up for an endowment plan?
- Things to look out for when speaking to an agent about endowment plans
What is an endowment plan?
Before diving into the various types of endowment plans available, it is useful to understand what endowment plans are in the first place. The vast majority of endowment plans in Singapore have the following in common:
Payment of regular premiums
Unlike investments like shares or deposits, which require only a lump sum payment at the start, endowment plans require you to continue paying premiums throughout the lifespan of your plan.
These premiums are generally of a fixed amount each time you pay, although you might have the opportunity to increase or reduce your premiums if you make changes to your plan. You may be required to pay every month, quarter, 6 months or year.
Fixed maturity period
There is no watching the market so you can buy low and sell high when endowment plans are involved. They run for a fixed amount of time, usually between three to twenty years. The maturity period that is appropriate for you will depend on your goals and circumstances.
If you are in your twenties or thirties and planning for retirement in the long term, a longer maturity period might be appropriate, while older people who are looking for a low risk type of investment shortly before or during retirement will need a shorter maturity period (like Tiq’s 3-year plan).
If you are investing money to achieve a certain goal, such as buy a home or pay for your child’s university fees, the appropriate maturity period will depend on when you need the payouts.
Do note, however, that endowment plans are rarely appropriate for short-term plans of less than 3 to 5 years. So if you just need somewhere to park your cash for a year or two, you should be looking at investments like fixed deposits or Singapore Savings Bonds instead.
Payment of returns upon maturity
When your endowment plan reaches maturity, you will be paid the returns of your investment. However, you won’t know ahead of time how much you’ll receive, as that will depend on the results of the investments the company has been making on your behalf.
When you sign up, the insurer will usually quote you a guaranteed return amount, which is the minimum payout you receive and may be higher or lower than the sum of all the premiums you’ve paid over the years. That means that if the guaranteed return is lower than the sum of all the premiums you’ve paid, you risk losing money.
Anything over and above that amount is non-guaranteed and will depend on investment performance.
There is a reason most of the companies selling endowment plans are insurers. Endowment plans usually come with an insurance component in Singapore, most commonly life insurance.
So, are endowment plans a form of insurance or a form of investment? Well, the answer is that they’re a hybrid.
A portion of the premiums you pay will go towards paying for your insurance, while the remainder while go towards the investment. So choosing higher insurance coverage will mean that you will receive lower returns when your policy matures.
The irony is that the insurance coverage is usually too basic to rely on. So if you actually do need life insurance, you should probably take out a separate plan to cover the gaps.
Why do Singaporeans buy endowment plans?
Endowment plans can be one way to invest if you have a medium- to long-term financial goal to achieve.
Some of the more common reasons Singaporeans buy into endowment plans include the following:
Retirement – Endowment plans are often marketed by insurance agents as a good way to prepare for retirement, and can be one way to boost the amount of savings you have when you’re about to step into retirement.
Forced savings – Many young people tend to regard endowment plans as “forced savings” plans, since they’re required to make regular payments. However, note that if the only thing you want is to put money aside, you might want to consider a regular savings plan instead, usually provided by banks.
Investment purposes – While an endowment plan probably shouldn’t be the only type of investing you’re doing, it can be one component in your investment portfolio.
Children’s education fund – Higher education is usually quite expensive. Even if your child eventually goes to a local university, you can still expect to pay at least about $30,000. Endowment plans offer predictability by letting you plan it such that they mature just as your child begins tertiary education.
Why should you sign up for an endowment plan?
So, we all know that endowment plans require you to pay a certain amount of money at regular intervals, with the hope that you’ll get more money back when the plan matures.
But with are so many other types of alternative investments available, why would you want to pick an endowment plan?
You need the insurance coverage
If you actually want the insurance that’s offered by endowment plans, that’s a good argument for signing up for one.
While the insurance coverage offered by such plans is usually not sufficient on its own, if you already have your own insurance policy, the protection from your endowment plan can act as a supplement to that.
On the other hand, if you don’t need the extra insurance coverage at all and are thinking of getting an endowment plan only for the investment component, it might not be for you, since to put it bluntly the returns are often crap as a standalone investment.
You need a predictable investment
When in comes to more volatile types of investments like stocks, it’s hard to figure out when would be a good time to cash out.
With endowment plans, you know for sure that when yours reaches maturity, you are going to receive your payouts. If you absolutely need the cash for something by the maturity date, such as if your kid will be going to university in a particular year, then you can have the peace of mind that your money won’t still be locked up in your investment when you need it.
Many endowment plans also give you the option of liquidating if you need the money urgently. This might result in your making a loss, but it is not going to be as tragic as selling your stocks in a stock market crash.
You’re looking for a low risk investment product
Endowment plans are generally considered a low risk investment. While you can lose money if your guaranteed returns are lower than sum of the premiums paid over the years, that also means your losses are capped.
Why should you NOT sign up for an endowment plan?
Unfortunately, too many people don’t think about the following disadvantages before they sign up for endowment plans
You don’t need the insurance coverage
Many people who sign up for endowment plans at the behest of an agent actually shouldn’t be doing so. Insurance agents always highlight the investment potential of endowment plans, but don’t forget that your returns will come at the cost of the insurance, since a portion of your premiums will go towards paying for the insurance rather than added to the investment. Furthermore, the returns are usually very low for a stand-alone investment product.
So if you have no use for the insurance component, you should probably consider investing your money elsewhere.
You are looking for high returns
The returns offered by endowment plans are quite low. If you’re looking for higher returns and can afford to take on more risk, go invest in ETFs or stocks.
Note that while your insurer might be investing on your behalf in a participating fund, what you receive will be way lower than the returns that were actually earned, as your insurance premiums as well as fees to the insurance company will eat up a big chunk of your returns.
However, if you still want to include an endowment plan in your investment portfolio, know that some plans have higher guaranteed returns (as a proportion of the amount you pay in) than others. These are usually plans with shorter terms, rather than the 15- to 20 year-long ones marketed by agents as appropriate for retirement savings.
You should not be making such a long commitment
The longest endowment plans are up to 20 years long. That’s a helluva long time to have your money locked up, and to be obliged to pay premiums.
If you need to cash out on a whim or forsee cashflow problems, you should opt for more liquid investments or look for endowment plans with shorter terms.
You may lose money
If your guaranteed returns are lower than the total amount paid in over the years, you risk losing money. If you’re looking for an investment product with guaranteed returns, you’ll want to look for endowment funds with higher guaranteed returns, or just park your money in a fixed deposit or Singapore Savings Bonds.
Things to look out for when speaking to an agent about endowment plans
If, despite all the caveats, you’ve decided that an endowment plan is the right choice for you and have arranged to meet with insurance agents to find out about their products, here’s what to look out for.
What is the amount of guaranteed returns?
From an investment point of view, this is the most important point. Ideally, your guaranteed returns should be higher than the total amount paid in.
Know the structure of the non-guaranteed returns portion
Of course, you shouldn’t just be hoping to receive only the guaranteed returns, but also as much non-guaranteed returns as possible. So make sure you study the details of your non-guaranteed returns.
Your agent should be able to supply you with a chart detailing the maximum non-guaranteed returns you can receive at the end of each year. Try to avoid signing up for plans offering $0 non-guaranteed long for more than a year or two.
Know how much insurance coverage you are getting
As has been stressed ad nauseum, you should buy endowment plans only if you want to receive the accompanying insurance coverage.
So it makes sense to read the insurance policy wording and know what coverage you are receiving. If, as is likely, you find that the insurance coverage is insufficient on its own, you can then see how useful it is as a supplement a stand-alone life insurance policy.
Know how long you have to hold the endowment plan and what the early redemption and surrender penalties are
Always know what the consequences are of liquidating or surrendering the policy before your maturity date. There are usually guaranteed and non-guaranteed amounts you will receive if you surrender the policy.
Remember again that for many people who sign up for endowment plans, it is actually a pretty bad investment choice, especially if they don’t need the insurance coverage or should be investing in something that offers the potential for higher returns. The best endowment plan is one is appropriate for your specific needs, so choose with care.
Have you ever signed up for an endowment plan? Share your experiences in the comments!