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... moreCommonly 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.
