Different Types Of Endowment Plans In Singapore

Different types of endowment plans

This article first appeared on DollarsAndSense.sg

If you have been through a financial planning session with an advisor, there is a good chance that you would have heard of Endowment Plans. You may even have bought a plan (or two) after discussing with your financial advisor.

But what exactly are endowment plans? More importantly, are you buying the right plans that fulfill your needs?

What Are Endowment Plans?

In Singapore, endowment plans are sometimes known as “endowment insurance”, mainly because there is usually an insurance component tied to the plan.

There are a few characteristics that typically defines an endowment plan is.

Maturity Period: Endowment plans will have a fixed maturity period. This is generally between five years to 20 years, depending on the type of plans that you buy. Usually, the maturity of your endowment plan should coincide with your objective for having bought it in the first place.

Fixed Regular Premiums: Endowment plans typically require the regular payment of a fixed premium. Insurers usually offer the choice of paying for your premiums on a monthly, quarterly, semi-annually or annually. Alternatively, some insurers also provide plans that allows for the plan to be bought using a single premium (i.e. a lump-sum payment).

Insurance Coverage: Endowment plans usually comes with some insurance component. Do note however that in most cases, insurance coverage provided by endowment plans are usually insufficient, on its own, to adequately insure individuals. You should avoid thinking that your endowment plan is a suitable alternative to a life insurance plan.

Why Do People Buy Endowment Plans?

People buy endowment plans for a variety of reasons. Usually, this involved financially working towards something important.

Education:

The most common example in Singapore would be to plan towards a child’s education. Parents who buy an endowment plan will pay fixed regular premium. When the plan matures, the payout received can be used to fund a child’s education.

An example of such a plan will be the AIA Smart Growth (II).

Source: AIA

Retirement:

There are endowment plans that are specially designed to help policyholders work towards their retirement.

The key difference between these retirement-focused plans and the ones that are designed for education is the way payouts are disbursed upon maturity.

Instead of a lump-sum payout, most retirement-focus plans provide a steady stream of monthly income to policyholders upon reaching a certain age. Very often, this payout comprises of both guaranteed returns and non-guaranteed returns.

An example of such a plan will be the MaxRetire Income. MaxRetire Income provides policyholders with a steady stream of monthly retirement income from 65 (age next birthday) to either age 85 or 100 (age next birthday).

Here’s an example of how it works.

Source: DollarsAndSense, Information extracted from OCBC

Another example of a retirement-focus plan is AXA Retire Happy. Similar to the MaxRetire Income, the plan provides regular payouts comprising of both guaranteed and non-guaranteed returns for policyholders upon maturity.

The biggest draw for these retirement-focus plans is that it provides a guarantee retirement income. Regardless of how badly the financial markets perform, insurers are obliged to pay the guaranteed payout promised to policyholders.

At the same time, the non-guaranteed payout is a bonus that policyholders can also look forward to, with the exact amount depending on the performance of the insurer’s participating fund.

Savings:

In recent years, we have seen insurers offering savings plans to consumers in Singapore. These savings plans are a type of endowment plan. Commitment period for such plans tend to be shorter, from as little as three years.

As its name suggests, the primary purpose of these plans is to help policyholders save, and to earn an interest that is higher than what they would earn in a regular savings account. An example of savings plan would be the Easy save series offered by Etiqa. You can read up more about the plan in our article.

Questions That You Should Also Be Asking

Besides knowing the different types of endowment plans there are, and whether they are really suitable for your needs, there are some other factors that you should consider before committing to any plans.

Is Your Endowment Plan A Participating Or A Non-Participating Policy?

A participating policy means that part of your returns will be tied to the performance of an insurer’s participating fund. If you are enticed by the attractive payout offered by an endowment plan, check if the returns are guaranteed or simply projected (i.e. non-guaranteed). If they are projected returns, then you should also differentiate between what’s guaranteed, and what’s non-guaranteed.

What Are The Insurance Coverage?

As mentioned earlier, most endowment plans offered by insurers will have some form of insurance coverage.

The extent of the coverage you receive from the endowment plans do matter, as it would indirectly affect the actual returns that you receive. With all things being equal, you should be expecting lower returns if the insurance coverage that you receive is higher, and vice versa.

DollarsAndSense.sg is a personal finance website that aim to help Singaporeans make better financial decision.

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

Common Misconceptions About Endowment Plans

An image that shows that fundMyLife is addressing common misconceptions about endowment plans

Usually presented as a form of forced savings plans for certain financial goals, endowment can take on several roles be it for investment, insurance, and even a mixture of both. Undoubtedly, given its many facets, it is not surprisingly that there are plenty of misconceptions about endowment plans.

Say endowment plans to anyone, and chances are that you might see the person shudder. After all, endowments are commonly sold by relationship managers in banks and financial advisers – the plan has gained quite a bit of notoriety. That said, we here at fundMyLife believe that each financial product serves a particular purpose.

Earlier on, we asked a few of advisers of fundMyLife about their opinion on endowments and from their stories we observed that there were several consistent misconceptions that consumers have regarding these plans. As such, in this article, we highlight these common misconceptions about endowment plan that people have.

#1 Endowment plans are not liquid

Contrary to what a (possibly) errant adviser or relationship manager in a bank might tell you, endowment plans are not liquid, i.e., you cannot back out in between premium payments and you’re locked in for the stipulated time period in the plan. According to our research, this is a surprisingly common misconception about endowment plans.

While it is a good way to enforce savings for a particular financial goal, the mandatory monthly payments may become a major source of stress when you are unable to make payment due to unforeseen circumstances. As such, it is important to recognize this fact early and consider what’s the best place for your money.

#2 Guaranteed value does not always mean you make more money

In the Benefits Illustration of the plan generated for you by your financial adviser, there are several columns that require your attention.

Credits to Singapore Hardware Zone

With reference to the table above, there are a lot of numbers, but the most important parts are highlighted in the following table.

Arrows drawn to show the guaranteed death benefit (black) and guaranteed returns (red)

Assuming the plan matures in 15 years, the guaranteed amount upon maturity is still less than the basic premiums paid. Thus, it is useful to compare the guaranteed portion of the plan vs the principal paid to see how much you lose in the worst case scenario. In the ultimate worst case scenario where there is no non-guaranteed returns at all (quite unlikely), you might lose quite a bit of the principal that you paid!

Therefore, it is always important to update your Benefit Illustration from time to time so that you know your endowment plan is on the right track.

P.S. If you haven’t noticed, for a lot of Benefit Illustrations, you can see that the column for death benefit will always come first because the value is always higher than premium paid. Your eyes will always land on the higher value first, before going to the lower value. We don’t know if it is intentional, but it’s good to train your eye and tear it away to look at the surrender/maturity value.

#3 Projected returns ≠ your returns

This brings us to the next point about returns. Even if the fund performs at the stipulated level and reaches the projected returns, what you are getting will always be less than advertised. That is because when the fund achieves either 3.25% and 4.75% returns on their investment, it’s the fund that achieves that returns and not your plan. Hence the careful wording: “projected returns of investment”.

#4 Flexibility might not be the best thing

And that brings us to this point on flexibility and returns. In a bid to make endowments more attractive, insurance companies introduced plans with payouts. It is a welcome feature, since the payouts can either be reinvested or be used for other things. However, is the flexibility truly a good thing? Let’s have the math do the talking. We came across an excellent table from Talk Money Lah illustrating the difference in internal rate of returns between reinvesting cashback and withdrawing the cashback (the rest of the article is pretty awesome as well).

Upon closer calculation, having payouts at regular intervals give you lower returns when the plan matures. Even with the same amount of principal, the internal rate of returns can be different at the end of the policy term. You can see that there is a trade-off between flexibility and returns upon maturity.

In our earlier piece, the financial advisers of fundMyLife opined that if liquidity is an issue, you can either do either

  1. a fixed endowment but at lower amount of premium, or to
  2. split the money into both endowment and something safe like Singapore Savings Bond

#5 Endowments are not worse than investments

At the risk of sounding cliched, comparing endowments to investments is the same as comparing apples to oranges. Both are separate asset classes with different levels of risk and structure. Furthermore, both are used for different purposes.

One good thing about endowments is that having guaranteed returns means even at the worst of times you would still have a sum of money, as opposed to investing where your money could potentially vanish if the stock market goes awry.

There is much lower risk in that respect. Furthermore, the timed component of endowment plans also means you can plan years ahead, something which stocks won’t be able to 100% guarantee. Despite the seemingly damning misconceptions, endowment plans do serve a purpose.

Conclusion

Judging from the following misconceptions, can we say that endowment plans are bad? Objectively, no. Endowments instill discipline for those who might otherwise not save for their financial goals. You just have to figure out which plan is the right one for you at your particular life-stage. More so, guided by a trusted financial adviser.

That’s all we have on the common misconceptions about endowment plans! We hope you found this article useful. Still unsure if endowment plans are right for you? Head on to our main site and ask our curated pool of financial advisers!

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

The Pros and Cons of Selling Your Endowment Plan In Singapore

Pros and cons of selling your endowment plan to third party investors

An endowment plan is a kind of policy where you contribute an amount of money over a fixed period of time. Upon maturity, you will obtain a sum of money which may or may not be more than what you put in over the entire time period. In addition, this plan is commonly promoted as a way to save for specific life-stages. However, given the fact that you have to continuously pay the premium and surrendering the plan prematurely incurs a huge loss, this plan is a constant topic of debate and discussion.

Earlier on, we wrote about what to do if you think your endowment plan might be a mistake. One of the things you can do is to sell the endowment plan to a third-party investor. In this article, fundMyLife discusses the pros and cons of selling your endowment plan.

Pros of selling your endowment plan

#1 Better cash flow

As mentioned, endowment plans require you to stay committed over a period of time. Typically, this can range between 5 to 20 years.

Liquidity is an issue since your money is locked up in the plan. Some endowment plans have a timed payout structure that provides flexibility to policyholders. However, it becomes more stressful when you have unexpected episodes in your life that requires more liquid cash. Furthermore, over time you might be more financially savvy and you are confident that you can do better investing the money elsewhere.

By selling your endowment plan, the most obvious upside is that you immediately free up a sum of money that was put into the plan. In addition, you no longer have to commit to the usual monthly payments. This frees up your money for either other uses, or you can redirect the money to other forms of investments.

#2 More money obtained compared to surrendering

Suppose you can no longer afford the monthly payments, paying the premiums becomes a chore and you lose your peace of mind. If you stop payment, the policy lapses after a while. A premium holiday or a policy loan may alleviate the cash flow problem for the time being but will not solve things in the long run. Furthermore, doing these short-term measures will decrease the payout upon maturity regardless.

Typically, when you have no other choice, you can opt to surrender your policy for a sum of money back, as shown by the Benefit Illustration. However, surrendering your policy often nets an abysmal amount compared to what you have put into the premium so far. Instead, by selling your policy, you may obtain 5-20% more from the third-party companies compared to surrendering it alone.

Cons of selling your endowment plan

#1 Loss of protection and benefits

Endowments generally come bundled with a form of insurance coverage. There are plans that add that you do not require any medical check-up as well. If you purchased an endowment with death, terminal illness, or total disability protection, selling your endowment plan means you will lose that benefit.

However, if you were already adequately insured by other insurance plans, you should be fine. That said, if the endowment was all you have it is wise to obtain low-cost protection, e.g., term policy.

#2 Readjustment of your financial goals

Ideally, when you purchased the endowment, it was meant for a particular financial goal – retirement, education for the children, or even a second property. However, once you sell the endowment policy, it implies that the journey to what you were aiming for has taken a short detour. As such, it is prudent to discuss your readjusted financial goals with a trustworthy and experienced financial adviser.

On the other hand, given how rampant endowment plans are sold, chances are that you might have unwittingly purchased this without knowing why. All the more it is important to revisit the financial conversation with someone else more trustworthy after selling your endowment plan (hint: it’s the advisers on fundMyLife).

For Your Information

Wondering where you can sell your endowment plans? Here are some of the companies that can buy them:

  1. REPs Holdings
  2. Purvis Capital
  3. Conservation Capital
  4. First Grand Capital

It’s useful to get the latest information of your policy to get the surrender value so that you can get quotes from those companies. Note that these companies usually buy plans which are close to maturity, e.g., a 20-year plan with 5 years to go. However, it is still worth inquiring to see if you qualify – our research shows that the companies do buy them early as well. Another thing to note is that endowment plans paid for using CPF or SRS are not eligible for selling.

Conclusion

That’s all we have folks. Hopefully you have more insights into selling the pros and cons of selling your endowment plan. Still have more burning questions about your finances? Head on to our main site and ask our curated pool of financial advisers!

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

The Pros and Cons Of Buying An Endowment Plan In Singapore

This article first appeared on DollarsAndSense.sg

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 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:

#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).

Source: AIA

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.

#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.

#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:

#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.

#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.

#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.

Summary

Here are the pros and cons of an endowment plan which you should fully understand before you even consider a policy.

DollarsAndSense.sg is a personal finance website that aim to help Singaporeans make better financial decision.

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

Ask fML Advisers: What Are Your Opinions on Endowment Plans?

[5 min read]

Usually marketed as a form of “forced savings”, endowment plans are long-term plans designed to help you achieve a certain financial goal over a time period. We have written at length on endowment plans, and what to do if you ever think of selling them. However, while we hear a lot of stories from friends and family about endowment plans, what do financial advisers themselves think?

In this article, we asked three financial advisers of fundMyLife – Melvin from Manulife, Jonathon from Prudential, and Ryan from AXA – on what they think of endowment plans, such as interesting case studies and common misconceptions. Without further ado, here’s what they have to say:

Melvin Liu, Manulife

Melvin Liu's picture
Melvin Liu, Manulife

What is your opinion on endowment plans?

At least half of the people I encountered have the general impression that the returns are guaranteed, that they are safe and likely to hit the projected returns. They forgot that they were told that the projections are not guaranteed, only to remember when I reminded them.

When I look at endowment plans, I study three things:

  1. Guaranteed Cash Values/Projected Yield to Maturity
  2. Liquidity/coupon paying features
  3. Intention and suitability of clients for considering endowments as an option

In general, I noticed that endowment plans have evolved over the past five years and not all endowments are the same since each may differ in features such as premium-paying periods, liquidity options and protection features. The plans nowadays are competitive and the guaranteed amount upon maturity aims to be on par if not higher than total premiums paid.

My personal opinion is that people really need to understand why they are purchasing endowments in the first place. In addition, people generally should not plan to withdraw cash benefits (where applicable) from their endowment plan before maturity, unless its necessary.

What are some interesting stories that you’d like to share with us? 

There were two cases I was involved in.

In the first case, it involved a 21-year old lady who was seeking my advice on an endowment plan she recently purchased which she was having 2nd thoughts about her choice. She was contributing a substantial amount of her monthly income, i.e. $750/month, to a 25-year premium paying endowment plan. She got this particular endowment plan from someone she met at a roadshow. Moreover, she was a Malaysian working in Singapore, and having to sustain her premiums for a good 25 years here might sound challenging due to many potential uncertainties, to which she agreed. After consideration, she deliberated between keeping it for another 2 years or so when she could surrender it to take back some cash, or to surrender it straightaway after paying for about 6 months. I showed her objectively the difference in the amount she would lose if she hung on for another 2 years vs surrendering immediately, i.e. $16k+ vs $4.5k respectively, and let her make the call. She eventually managed to resolve it with the agent, and I didn’t probe further on her decision.

In the second case, I was advising a 50-year old lady on her plan to have a regular stream of income in about 2 years time for her retirement. She was surprised that I advised her that she did not need any plans after I reviewed and advised that she was ready to retire with the sum of money she already had. However, she nonetheless was keen to see what options she had to put her in a better financial position while meeting her income needs with a lower risk. We worked out a few options and suggested that she could prepaid an endowment plan in a lump sum so that she can start getting guaranteed cash coupons as retirement income from the second year onwards while maintaining her desired lump sum balance for security and/or legacy.

Endowments are generally more suited for those who wish to take on a lower risk, prefer having a guaranteed cash value component and have a specific time period to save and cash out for their needs.

However, endowments are often promoted also because they are easy to sell and easily positioned as forced savings e.g., for young adults who are starting to work. Like any financial plan, endowments should be recommended as an option only if it meets the client’s needs and not just simply a way to save money.

Jonathon Han, Prudential

Jonathon Han's picture
Jonathon Han, Prudential

What is your opinion on endowment plans?

A major misconception that people have regarding endowment plans is that they think that these plans are lousy. People often compare endowments with investments, which is like comparing apples with oranges – they are different asset classes with different risk categories.

Endowments are good to grow money at a secure rate for timed events, for example an education fund for children or a retirement fund. If you choose to invest in the stock market instead, the time horizon involved, e.g., 20 years, means that you risk a situation where you disappoint your children because the markets are not doing well.

Important point: besides using endowments for retirement and children’s education, it can also be used to build capital towards buying a second property. The advantage of using endowments over investments is that endowments are less susceptible to market fluctuations. On the other hand, property prices and the stock market are correlated; in the event of a market downturn, both stock and property prices fall which defeats the purpose of investing for a second property in the first place.

The second major misconception is that endowments have poor returns. The perceived low rate of returns is due to the financial adviser allocating too much percentage of the premiums to protection instead of investments. Ideally, you should find someone who can advise and allocate the investment-protection proportion correctly. In fact, it is possible that certain endowment plans can beat Singapore Savings Bond and fixed deposits.

Currently, most insurance companies have endowment plans where you can withdraw money after 2 years. However, if you choose to withdraw the money instead of re-investing for further compounding, the returns might be much lower at maturity. As such, I advise clients to take up fixed endowments but pay less premiums for a relatively higher rate of return compared to those cashback endowment plans.

The third misconception is a lot of practitioners introduce the projected 4.75% investment rate you see in the Benefits Illustration as interest, THIS IS NOT ACCURATE. The effective annual interest rate is also something consumers might find it hard to calculate unless they have an access to a financial calculator.

What are your thoughts on picking a good endowment plan?

I believe 80% of people who buy endowments are happy because they serve a good purpose for their needs. Please note that not all endowments are designed to be withdrawal before their maturity. There might be a serious misconception among customer who buy endowment plans from banks that these endowment plans are fully liquid, please bear in mind that endowment plans are never as liquid as compared to your current account.

Secondly, it is important to study the performance of the insurance companies selling the endowment. Endowments are paid of out a participating fund and if it does well, insurance companies have more funds to allocate to policyholders, i.e. 90% surplus to policyholders and 10% to shareholders. As such, it is useful to pick major insurance companies with good track-record of participating funds – you find the information online. Note: past performance is not indicator of future outcomes.

Lastly, decide whether you want the endowment plan to be fixed or flexible. Don’t ask for flexibility unless you need it since it reduces returns in the long term. You should decide also if you need to add on riders for the protection component. However, keep in mind that the cash value of the protection does not increase over time.

Ryan Teo, AXA

Ryan Teo's picture
Ryan Teo, AXA

What is your opinion on endowment plans?

People often have the misconception that the returns are guaranteed. Another misconception that people have is that they mistake returns in the Benefits Illustration with interest rate which are two completely different things.

In general, endowments are pretty standardised. I take into account the length of the policy when it comes to endowments. What I advise people looking into savings plans but have concerns about liquidity, is to invest 1/3 of their funds into the Singapore Savings Bond and the remainder into an endowment plan. This arrangement provides liquidity.

Endowments generally have a trade-off between returns and flexibility. For example, for plans with cashback, the total maturity may be higher but guaranteed sum may be lower than premiums paid.

A thing to take note: inflation should be considered when it comes to endowment plans. At the break-even point, i.e. the point where the surrender value is the same as premiums paid, the duration of the plan also implies that technically the consumer loses a bit of money due to inflation.

fundMyLife Summary

The major misconception that the public have for endowment is that the sum assured is, well, 100% assured. The advisers caution the importance of understanding what you’re in for when it comes to endowments and know exactly why you’re getting what you’re getting.

Melvin shared what he looks for in endowment plans and recounted two interesting client stories – one who benefits from getting an endowment and the other, not so. Jonathon listed three major misconceptions that the consumers have regarding endowments and provides his thoughts on picking a suitable endowment. Finally, Ryan Teo noted the tradeoffs when it comes to flexibility and returns in endowment plans.

If you’ve more questions on endowment or any other insurance plans, head on to our main site and ask our curated pool of financial advisers! Alternatively, if you’d like to connect with either Melvin from Manulife, Jonathon from Prudential, or Ryan from AXA, just click on the link in their names and you can ask them questions directly from their profile pages.

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

Here’s What You Need To Know Before Selling Off Your Endowment Plan

Thinking to sell endowment plan

Endowment buyers typically belong in three different groups. People who:

  1. forgot why they bought it
  2. know why they bought it
  3. didn’t know why they bought it

If you belong to the first group, go dig your storeroom for your policy and recall why you bought the plan in the first place. Go ahead and contact your insurance company to update the benefits illustration and see if it still aligns with your financial goal. On the other hand, if you belong to the second group, well done and we hope you’re on track to achieve your financial target. Lastly, if you belong to this group, you’re most likely confused and frustrated since you are paying regularly for something you weren’t sure of. Typically, members of the last group of consumers would have the strongest reasons to sell since it is a pain on their cash liquidity.

Endowment plans are like marmite

Endowment plans can evoke quite strong feelings of either hatred or love. When used properly at the right time in your life, it is a good way of saving over a period of time to achieve certain financial goals upon maturity. However, when used inappropriately at the wrong time instead, you end up paying the premiums begrudgingly   with seemingly no end in sight.

In our previous article, we mentioned that selling your endowment plan is a viable option if you want to get out of this expensive ride. It’s a decision that can help you make the best out of the worst of situations. For the kiasi and concerned consumers, fret not – it’s perfectly legal.

While it is a relatively fuss-free experience to sell your endowment (based on real-life accounts), you should nonetheless take note of a few things. In this article, fundMyLife shares several things you need to know before you sell your endowment plan.

How long more before your plan hits a (meaningful) milestone

It sounds like a bad question, but can you afford to hang onto the plan? If you’re selling it because you have a sudden expense, debt, or lack of liquidity, it is truly understandable and you should strongly consider selling it. However, if you can afford to hang on to it just a bit more for a couple of years, you might lose relatively less; the percentage gap between premium paid and surrender value closes as it approaches maturity.

In addition, there is a point in your endowment plan called the break-even point. It is a point where the payout value is equal or almost equal to the total premiums paid. By selling your policy at the break-even point, you can immediately exit and not lose too much money, inflation notwithstanding.

Compare quotes and check eligibility

Buyers often look for relatively more profitable endowment plans that have a few years left before maturity. On top of that, there are currently several companies in Singapore which can buy over your plan so it’s good to compare quotes unless you’re in a great hurry for the money. In addition, these companies are looking for good returns after all so if your policy’s returns are too low, you have to brace yourself for rejection.

Furthermore, policies which were paid using CPF or SRS are not eligible. If it was, you’d have more people trying to sell their endowment plan to get CPF money out. Hahaha. No.

Look into insurance protection

Last but not least, after you sell your endowment plan, make sure you have adequate insurance coverage. Chances are, your product might have some protection component built in it. However, now that you’re going to sell it, it’s prudent to check if you need to make up for it in some other ways. You should talk to your financial adviser to discuss your next options. Otherwise, there’s always a handy platform online to ask financial planning questions (hint: it’s us).

Once all that is done, don’t forget to cancel any automatic premium payment if you set up any standing instructions with the banks. That’s all we have for now – all the best.

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

Understanding How An Endowment Plan Works In Singapore

This article first appeared on DollarsAndSense.sg

Endowment plans are a common type of insurance marketed and sold by financial advisors. Some of our recent articles have discussed these policies. Previously, we also wrote an article about why Singaporeans can consider using the Singapore Savings Bonds rather putting money in an endowment plan for long-term savings.

Many people we have spoken to varying degrees of understanding about endowment plans. Some consider it a form of investing. Others see it as a savings plan or a hybrid between a saving and insurance plan. And there are those who don’t care what it is, because they have already sworn off these products completely.

Before you think about getting an endowment plan, perhaps it is best to first understand what an endowment plan actually is.

Endowment Plan For Saving

Most financial advisors market endowment plans as a form of savings. The term, “forced savings” is often used in the sales pitch.

When you buy an endowment plan, you can expect to contribute a regular amount to the plan for a designated time period. For example, you may opt to contribute $3,000 a year to a plan for 10 years. Alternatively, there are also single premium plans, where you put in a lump sum amount at the start of the policy.

The length of your contributions may not necessarily be the maturity of your endowment plan. You could be paying your premiums for 10 years and be expected to hold the policy for another 10 years before it matures, giving it a total duration of 20 years.

An endowment plan is frequently used when a policyholder intends to save up money towards some specific financial goals. For example, a 45-year old person who wants to save up for retirement may choose to buy a 20-year plan that matures when the person turns 65.

Endowment Plan As An Investment…

The main difference between an endowment plan and saving money in a bank account is the investment component of the plan.

The insurance company will use the premiums you contribute to invest in range of financial products. The objective of this is to earn higher returns on the money.

A typical endowment plan would usually consist of a guaranteed and a non-guaranteed return. You NEED to take note of this because a financial advisor may skim through the guaranteed portion and focus only on the non-guaranteed portion of the plan.

Guaranteed Return:

The guaranteed portion of the policy is what the insurance company is obliged to return to you, regardless of how badly the investment portfolio has performed.

Typically, if the guaranteed portion is higher, it also translates into the insurance company taking lower risks in their investments. It is also extremely important at this juncture to note that the guaranteed portion of certain policies may be lower than the premiums you have been putting in.

Non-Guaranteed Returns:

The non-guaranteed component of the policy is the additional returns you may receive if the portfolio performs well. The return rates that would be shown in the benefit illustration will be pegged at 3.25% and 4.75% respectively. This is standardised across the industry.

Two things to take note here.

Firstly, these two numbers do not necessarily represent what the insurance company is aiming for or hopes to get. It simply shows how much you will get if the participating fund achieve 3.25% or 4.75%. That’s all.

Secondly, if you do an excel table, you will quickly find that the actual returns shown in your benefit illustration does not tally with the 3.25% or 4.75% returns.

The table below shows the returns you should be getting if you put in $12,053 per year for a period of 5 years, and then hold on to the policy for another 5 years.

Table 1

Table 2 shows the actual return you will get if the fund achieves a 4.75% return in its portfolio.

Table 2

As you can see, the actual returns from this particular policy only gives an actual return of 1.8% per annum back to its policyholder, even though the portfolio gave a return of 4.75%. This is due to the “Effects Of Deduction”.

We won’t go into details of that today. The main thing you need to know is that the portfolio return does not equate to your actual returns, which are usually much lower.

Endowment Plan As Insurance…

Endowment plans may sometimes have an insurance component included. These plans would have a sum assured tag to the policy. This provides a payout in the event of death or permanent disability to the policyholder.

Due to the fact that endowment plans are mainly for the purpose of long-term savings, relying on them to provide coverage would usually be a costly option.

As with all insurance policies, cost of coverage will differ depending on the age, gender and health related issues of a policyholder.

DollarsAndSense.sg is a personal finance website that aim to help Singaporeans make better financial decision.

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

What To Do If You Think Your Endowment Plan Sucks

A woman frowning at her iPad, presumably because she thinks she has a bad endowment plan

Ah, the endowment plan – the bad boy of financial planning. Often, we encounter people who express regret at taking a lengthy endowment plan with perceived low returns, often realized too late after several years of payment. The (rotten) cherry on top? The friend/acquaintance/NS buddy who sold it over an impromptu coffee session many years ago has long left the industry.

If this sounds too familiar and you think you yourself or someone you know got a bad endowment plan on hand, read on first. Here are several things that you can or should do if you think your endowment plan sucks.

Consider why it is a bad endowment plan in the first place

Before we ask why it is a bad endowment plan, it is important to understand what an endowment plan is. An endowment plan is a plan where you contribute regular amounts of money to a time period, or a lump sum at the start of the plan. At the end (provided you survive to the end of the policy term), you’d get a lump sum amount upon policy maturity and hopefully more than what you originally put in. It’s often touted as a plan to force you to save so that you can achieve certain financial goals, e.g., children’s education, retirement, etc.

It’s designed to be very flexible which further adds to the complexity. If you asked 10 people what an endowment plan is, you will get 10 different answers. Some say it’s for savings, others will say it’s for investments, and others think it’s a combination of both with neither’s benefits.

As such, there will be various reasons why you think it’s a bad endowment plan:

  1. You need to pay monthly/yearly and you are constantly racked with the uncertainty of returns upon maturity
  2. There is no liquidity, i.e. your money is stuck in the plan until maturity
  3. You think you can do better, after reading investment blogs and going through self-studying
  4. Turns out you already have insurance coverage and are paying for something that you don’t need in the endowment plan
  5. You are in a bad financial situation and cannot continue with the payment

Evaluate the future reward

To evaluate whether it’s worth continuing the policy, it’s best to look at the actual numbers. Firstly, you can track the performance of the policy via the Annual Bonus Update that the company sends to you (ask your financial adviser for it). It’ll provide details about the performance of the investment. On top of that, you will know if there are any bonuses given to you. Not many people do this, but you can request for an updated benefit illustration to reflect the new estimated non-guaranteed benefits.

Despite the reputation of endowment plans not reaching their projected amount, is the returns that bad upon maturity? According to the fantastic research by Kyith of Investment Moats (shout-out to the great blog by the way, we’re really big fans), the returns at the end of various plans’ tenure ranged between 1.9 to 5%. It might not be a bad idea to hold onto that plan after all.

Speak to your financial adviser

If you’re having doubts, you should check with your financial adviser to explore options you can take. For example, you can use the cashback/coupon to offset the premiums temporarily. You can also ask the adviser for premium holidays, which can buy some time until your cash flow returns to normal without terminating the plan. Bear in mind doing these will affect your policy’s rate of return in the long run. Never ask for a policy loan – it defeats the purpose of going on this plan in the first place and it has quite a high interest rate.

However, if you happen to be one of them who got the raw end of the deal and your financial adviser disappeared (we wrote briefly on this last time), you’ll have to figure out a way to contact the person in charge of your portfolio instead. Go ahead and give HQ a call.

Sell it

Alternatively, you can opt to sell your endowment to free up the cash. In the recent years, some companies like Purvis CapitalREPs Holdings and KashFrov have emerged to take over your endowment plans. It’s almost a win-win situation: those companies own your endowment plans and you get to lose less money than if you had just let your policy lapse.

However, for those with insurance coverage built into their endowment, it is really prudent to check if you have adequate coverage after selling your policy with your financial adviser. Hint: you can ask here too.

Let it lapse, terminate it, or surrender it

Finally, if all else is not an option, there is no choice but to discontinue it. That said, it’s never the best idea to let your plan die or surrender it prematurely. You’ll just have to cut your losses at this point, and hopefully things get better at a later life stage. However, it’s incidences like these that put people off financial planning – these situations are the source of those bad hearsay stories that you hear from friends and family.

That’s all folks (plus a disclaimer)

I hope our article shed some light on the things you should consider if you think you have a bad endowment plan. Don’t get us wrong – we’re not bashing endowment plans at all. Every product serves a purpose, and endowment plans are no different.

While fundMyLife doesn’t believe in bad insurance products, we believe that there is only bad advice (dispensed by advisers of questionable intent). That said, here on fundMyLife we curate our pool of advisers who have strong client testimonials and track record so rest assured you will receive great advice from them.

If you’ve questions on financial planning, head on to our main site and ask away!

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.