From The Straits Times    |

5 things you need to know about endowment plans in Singapore


What are endowment plans in Singapore?

Are you worried about having enough money to pay for your child’s college education? Will you have the deposit you need in 10 years for a down payment on a bigger home as your family grows? An endowment life insurance policy can help you save for these important life events while earning higher interest than your savings account.

An endowment policy is a type of term life insurance policy with a savings plan feature. The policy pays a lump sum payment upon maturity or death of the insured. The cash value at the date of maturity is typically higher than standard term or whole life insurance due to the joint insurance and investment feature. You will be charged higher premiums for the higher potential return. The insurance coverage may include death, total and permanent disability, and critical illness.

Endowment life insurance provides more flexibility than a whole life policy. You can choose the term, or maturity, of the policy and how much you want allocated to savings versus insurance. The major difference from a whole life policy is that the endowment policy’s term is 10 to 20 years, rather than your whole life. This makes it well suited for saving for an important life expense, such as college education.


How do endowment plans in Singapore work?

Let’s say you are 42 years old and invest $100,000 in an endowment policy with an annual premium of $5,000. The term of the policy is 20 years.

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The annual bonus is 4%, or $4,000. After 20 years, the bonus will be $4,000 x 20 = $80,000. At the time of maturity in 20 years, you will receive the initial investment of $100,000, plus the accrued bonus of $80,000. The total proceeds at time of maturity would be $180,000.  Your internal rate of return is around 6%, at least double an average savings account return.

This payout amount at the maturity date is guaranteed as long you make your monthly payments. If you die before the maturity date, your child will still receive the death benefit. While there is no minimum age to buy an endowment policy, it is more difficult to take one out after the age of 60.

With Profits
An endowment can earn an annual cash value, or bonus, based on the rate of return of the underlying fund your insurer places your premiums in. This bonus is used to pay the premiums of the life insurance policy. This feature makes the endowment policy self-sustaining when the bonus is high enough to cover the premiums. If the bonus does not cover the premiums, you will be required to pay the premiums out of your pocket.

Unit-linked Endowment
The most popular unit-linked policy is the investment-linked policy, whereby the premium payment is split between insurance and investment funds in which the insured buys units. The insured can choose the fund – growth or value, for example – and what proportion of the premium is invested in it.


What do you look out for in endowment plans in Singapore ?

Endowments pay annual bonuses when performance is good. These bonuses are applied towards your premiums. The smoothening of bonuses helps protect your fund returns from market volatility. If returns are low, however, the bonus may not be enough to pay your premiums. In these cases, you will need to pay the premium.

As a guaranteed life insurance product, the rate of return on endowment insurance is low. At the maturity of the insurance product, the endowment could be less than the final benefit value. In these cases, you will have several options to make up the difference. One would be to continue on a regular payment plan to make up the difference. Some endowments can be traded. The buyer will purchase the endowment at more than the surrender value the insurance company is currently willing to pay you. Upon assignment of the policy to the buyer, you no longer have liability for the policy. The buyer expects to maintain the policy and benefit as its value increases. If you are considering selling an endowment, you can get a free online valuation.


Why buy an endowment plan in Singapore ?

Endowments are a good way of saving for a specific event, such as college education, a wedding, a sabbatical year, and so on. Endowment mortgages are used to pay off interest only mortgages. The flexibility in payment terms, investment-linked funds and maturity also make them well suited for compensating for shortfalls in retirement savings.


What to look for when buying endowment plans in Singapore ?

The surrender value of an endowment policy may be taxed at the federal level. For this reason, they are not as popular today as other insurance policies that provide a tax advantage. They do provide the advantage of receiving a payout at maturity. With some foresight, this sum could be the amount you need to plug a gap in retirement savings and maintain your current level of consumption. Think of it as an insurance plan with a savings kicker. An endowment offers the dual advantages of insurance and investment but with relatively low risk.

This article was originally published in The New Savvy.

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