On the surface, endowment insurance plans and fixed deposit accounts may seem similar. Both types of savings options provide flexible tenure options, deposit amounts and have similar returns. However, there are some significant differences that can make one type of saving option a much better option for you over the other. Below, we provide an in-depth overview of endowment insurance plans and fixed deposit accounts, and offer guidance on which one may suit your goals better.
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What is Endowment Insurance?
Endowment insurance is a savings product that has a small life insurance component. Each month you pay your premiums (your savings contributions), which are calculated based on the amount you want to get back at the end of the plan's tenure. Endowment plans operate as "forced savings" because you have to pay your premiums or your policy will lapse. However, not all of your premiums will go towards the savings component of your plan. Part of the premium will be used to pay for the life insurance component. The standard life insurance benefit will be either 101% or 105% of your premiums paid and will cover you for death, total and permanent disability and in some cases, terminal illness.
There are many different types of endowment plans, which gives you the freedom to find a plan that tailors to your specific financial goals. You can mix and match a variety of policy terms (typically 5-40 years) and premium payment terms (typically 1-30 years). Furthermore, there are limited pay plans, which allow you to pay premiums for a few years or a regular-pay plan, which stretches out your payment period for the duration of your policy. Some plans also give you the option to pay with one single premium. The most common endowment plan you'll find is a traditional limited or regular pay plan that provides a lump sum payment when your policy matures. The three other main categories of endowment plans are:
- Retirement (Annuity) Savings Plans: You'll set aside money until you reach your retirement age. After that, the plan will pay out a monthly sum from your account. Generally, you have the option of choosing your retirement age, how long you want to receive payments and the monthly sum you want to receive.
- Education Savings Plans: These plans are created to fund your child's university education. Your child is the insured and the plan will provide several annual payments before and after your child enters university.
- Legacy Savings Plans: These are multi-generational savings plans that you pass down to your children/spouse, and in some cases, your grandchildren. Unlike other endowment plans, these plans are whole of life, which means your policy will be in force until you die. It will be up to you to designate who takes over the plan in the event of your passing.
When it comes to how much returns you can expect to receive, you'll have the option of choosing a participating or a non-participating endowment plan.
Participating plans will invest your premiums into the insurer's fund and you may receive a bonus depending on the fund's performance. If the fund performs well, you may end up with a higher sum at policy maturity. On the other hand, if the fund performs poorly, you may not get any additional bonuses. You should also note that some participating plans may not return 100% of your premiums at policy maturity—making the ability to generate a profit depends entirely on the performance of the fund. To reduce that risk, you can look for plans that provide a 100% capital return guarantee at maturity.
A non-participating endowment plan will provide the agreed upon sum at policy maturity—no more and no less. There also isn't any cash value associated with the plan and you will not be able to receive any bonuses. However, there is less risk associated with a non-participating policy.
Example of Participating vs. Non-Participating Plans
- 1. You purchase a 15-year participating policy where you pay premiums for 15 years. You choose to pay an annual premium of S$5,000 (around S$416/month). Over the 15 years, you will pay a total of S$75,000 in premiums. When your policy matures, you will receive a guaranteed return of S$80,000 and a non-guaranteed (bonus) portion of S$10,000. At the end of the 15 years, you'll have a total of S$90,000—equivalent to an interest rate of 1.22% p.a.
- 2. You purchase a non-participating policy where you pay a single premium of S$10,000 and let the savings accumulate over 3 years. It provides a guaranteed interest rate of 2.10%. At the end of the 3 years, you get your guaranteed return of S$10,643.
What is a Fixed Deposit?
A fixed deposit account is a low-risk, semi-flexible account that can be used to grow your savings. Similar to endowment plans, you deposit funds to the bank for a certain period of time ranging from 1 week to 3 or more years. At the end of the time period (tenure), you will receive your agreed-upon sum back along with the additional interest that accrued. However, unlike endowment plans, whose returns are sometimes dependent on the insurance fund's performance, the interest you earn in a fixed deposit is agreed-upon at the beginning of the contracted period. As a general rule of thumb, the shorter the tenure and the lower the deposit amount, the smaller the interest rate. On the other hand, the longer the tenure and the larger your deposit amount, the greater your interest rate.
As far as investment options are concerned, fixed deposit accounts are some of the most accessible investment opportunities. They are low-risk, have no additional bank fees, and can be available to a wide range of consumers.
Types of Fixed Deposit Accounts
There are several types of fixed deposit accounts, ranging from short-term fixed deposits to fixed deposits held in foreign currency. Identifying your financial goals can help you make the right decision when it comes to choosing your fixed deposit tenure, as they all have different advantages.
- Short-Term Fixed Deposits: Short-Term fixed deposits are fixed deposit accounts that range between 3-6 months. Some fixed deposits can have tenures as short as a week or two. However, in exchange for the faster accessibility to your funds, they provide a smaller interest rate.
- Long-Term Fixed Deposits: Long-term fixed deposit accounts allow you to hold money for 2-3+ years. If you're looking to save money for a longer period of time and earn higher interest, long-term fixed deposits may be more suitable for you.
- Foreign Currency Fixed Deposits: You may also opt for a fixed deposit in a foreign currency. This type of fixed deposit account lets you convert SGD to foreign currency, be it AUD, US or GBP. When the deposit tenure ends, your funds are covered back to SGD at the prevailing foreign exchange rate. It's important to compare banks when you are looking for a foreign currency fixed deposit account because different banks offer different interest rates for the same countries.Lastly, you should be aware that you may incur a loss if the exchange rate decreases in respect to the SGD.
Choose an Endowment Plan If…
1. You have a particular savings goal in mind
Since some endowment plans are geared towards a certain milestone, they can be good ways to get structured payouts for certain life events. Since you can choose your payout, plan tenure and premiums, an endowment plan can be a useful savings tool if you are looking to save for events with known costs, like university tuition, a wedding, down payment or retirement. They can be particularly useful if you choose a retirement or education tuition endowment plan that will provide cash payouts when the time comes.
2. You want to save but you also need to top off your life insurance
The main reason why endowment plans may be less suitable for some people is because part of your premium goes towards a life insurance component. Unlike life insurance plans, the life insurance offered in endowment plans is fairly low and won't provide enough coverage on their own. However, endowment plans can be suitable if you have a small insurance gap and at the same time want a boost in your savings. If you have enough life insurance, a fixed deposit account may work better.
3. You can handle more risk
Unlike fixed deposits, some endowment plans may carry risk. However, with the added risk, there can be a greater reward. Endowment plans can be suitable if you have a greater risk tolerance and want to receive a payout that is above and beyond your sum assured. However, you will also have to be prepared to lose money over the long term if the insurer's fund performs poorly, especially if you don't have a plan that provides a 100% capital guarantee. If you can tolerate the investment risk associate with endowment plans, then they can potentially provide greater returns than fixed deposits. On the other hand, if you want a stable interest rate and not run the risk of losing your money, a fixed deposit will be the better option.
Choose a Fixed Deposit Account If…
1. You want to park your money somewhere for a short period of time
Some fixed deposit account tenures are less than a year, making them good options for people who want to park their cash for a few months. In contrast to endowment plans that typically require at least a 2-year commitment, you can choose a fixed deposit tenure as short as 3 or 6 months. Furthermore, while fixed deposit accounts may charge early termination fees and you may lose part or all of your interest, it is still possible to get back all the money you put in. In contrast, terminating your endowment plan early can result in termination fees and a cash value that's less than the total value of the premiums you put in.
2. You want a low-risk investment with guaranteed returns
Because fixed deposits lock in your interest rate at the beginning of your contract, you will know what amount you will receive when the account's tenure expires. You won't need to pay any bank fees, engage in extra banking habits. You'll know these rates up-front and they are generally fixed to the tenure and deposit size. A short tenure (3 or 6 months) and small deposit (S$5-S$10k) results in an average interest rate of 0.41%. On the other hand, a large deposit (S$100k and higher) and a long tenure (24 or 36 months) has an average interest rate of 1.20%. The rate you agree to won't change throughout the duration of your account.
3. You want to save your money in a foreign currency
Since certain banks let you set up an account with a foreign currency, a foreign fixed deposit account may be more suitable than an endowment plan. While there are some endowment plans that provide foreign currency options, they are generally limited to USD. If you are looking to save in a foreign currency and are looking to make some extra cash from a favourable exchange rate, a foreign currency fixed deposit account could be a suitable option. However, you should note that there is always a possibility of losing money if the exchange rate is unfavourable when your account reaches maturity.
Choosing the Right Investment Strategy For You
To summarise, fixed deposit accounts and endowment plans are fairly similar investment options. They provide flexibility in their tenures, the deposit amounts and in some cases, the returns. However there are important differences to consider. For instance, endowment plans come with a life insurance component. They may also be tailored for particular savings goals such as education and retirement and will provide annual or monthly cash payouts. On the other hand, fixed deposits are less risky and are more accessible. They are also good choices if you want to save in a foreign currency. As always when choosing a financial product, you should carefully consider both your objectives and risk tolerance and remember to closely review the terms and conditions of the product you choose.