With so many savings products on the market, it can be difficult to decipher which one will best help you meet your financial goals. In this guide, we break down the differences between endowment plans and savings accounts.
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What is Endowment Insurance?
Endowment insurance plans are part savings plan and part life insurance. The savings portion of the plan makes up the largest portion of the plan and the life insurance component is the smaller portion. They work as "forced savings", since you have to make monthly premium payments or your policy will lapse. Part of your premiums will go towards the savings portion while another part will go to funding your life insurance portion. Your 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.
Endowment plans come in all shapes and sizes. You can choose from a variety of policy terms (typically 5-40 years) and premium payment terms (typically 1-30 years). You can either pay premiums for the same number of years as your policy or you can pay premiums for a shorter period of time than your policy term. Some plans give you the option to pay with one single premium.The most basic is a traditional endowment plan that will provide you with 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.
Furthermore, endowment plans can be participating or non-participating. Participating plans will invest your premiums into the insurer's fund and you will be eligible to receive a bonus depending on the fund's performance. The bonus is not guaranteed. Furthermore, you should note that some plans may not return 100% of your premiums at policy maturity, which means that your potential to make a profit depends entirely on the performance of the fund. On the other hand, a non-participating endowment plan will provide the agreed upon sum at policy maturity—no more and no less.
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 Savings Account?
Savings accounts offer a far more flexible and interactive way to accumulate funds over time. Consumers simply deposit funds–or even just credit their salary–to an account whenever possible, and can make withdrawals at will. While savings accounts are by nature more flexible than tenured investments (like endowment plans or fixed deposits), interest rates are often closely tied to consumer behaviour. Some accounts provide a flat rate regardless of balance variance or size. Most, however, incentivise continued growth or multi-product engagement:
- Continuous Growth Savings Accounts: Consumers who can make continuous deposits without making withdrawals can typically access special boosts to their interest rate. While some accounts offer bonuses on a month-to-month basis, others (especially those with the biggest rate boosts) require account holders to commit to such behaviour for 6-24 contiguous months. In such cases, breaking the pattern by making a withdrawal or failing to grow the balance may mean giving up the boosted rate altogether.
- Multi-Product Savings Accounts: Those who are financially savvy and don't mind tracking transactions or product engagement can typically earn at the highest interest rates. In fact, effective rates for accounts that reward additional banking activity currently range up to 3.88% p.a. These accounts are far more complex than the simplest savings plans on the market, but consumers benefit both from rapid interest accrual and the flexibility to make deposits and withdrawals as needed.
Beyond these details, there are a few additional important things to know about opening a savings account. First, most (but not all) accounts require consumers to make an initial deposit of anywhere from S$500–S$5k+. After setting up an account, consumers will typically need to maintain an average daily balance of S$1k+. If the average balance drops below the stipulated minimum, account holders will be charged a "fall-below fee" of S$2-$5 for the month. While this amount seems small, it can quickly cut through interest earnings for the month for those with lower balances, resulting in a nett loss. Nonetheless, individuals who carefully select a savings account that best fits their needs can earn competitive interest while also enjoying easy access to their funds.
What Should You Choose?
At face value, both financial products are similar in that they offer a place where you can grow your savings. However, these products are best fit to consumers with very different ultimate needs.
Choose an Endowment Plan If…
1. You want a disciplined approach to saving every month
Unlike savings accounts, where you can choose to skip putting your money into your account, endowment plans force you to save since your monthly payments are mandatory. You will also have to be prepared to not touch the money in your endowment plan for a long time. Otherwise, you risk the chance of facing penalties via termination fees and lost premiums.
2. 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 when you need them. Since an endowment plan forces you to essentially create a savings plan that will guarantee a particular return, it can be used to fund events with relatively known costs, like university tuition, a wedding, down payment or retirement.
3. 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. Unlike putting money into a savings account, not all of your premium will go towards your savings. This is why endowment plans are a great choice if you have a small insurance gap and at the same time want a boost in your savings. On the other hand, if you have enough life insurance, you can settle for a savings account.
4. You have a higher risk tolerance
Unlike savings accounts, endowment plans carry risk. This can be good for people who are willing to have some risk in exchange for a higher return. However, you will also have to be prepared to lose money over the long term, 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 savings accounts. If you want a risk-free savings option, then a savings account will be better suited for you.
Choose a Savings Account If…
1. You want flexible access to your funds
Unlike endowment plans or fixed deposits, savings accounts typically allow consumers to make withdrawals as needed. While some accounts offer bonuses to those who grow their balance month-on-month, you can easily opt for a plan without such restrictions.
2. You're a variable saver and can't commit to consistent deposits
With most savings accounts, you can simply make deposits whenever you can, rather than based on monthly stipulations. You can vary frequency of deposits as well as amount, matching your current needs and savings capacity. It always helps to credit your salary to your account–in fact, you can almost always earn an interest rate boost for doing so–but you can also easily withdraw what you need so you'll never feel trapped.
3. You have shifting priorities
As mentioned, endowment plans are often tied to specific life goals such as retirement or funding education. If you want to save money but aren't sure when you'll need it, or for what reason, you may be better off with a savings account. This way, you won't need to plan out tenure or when your monthly disbursements will begin.
Save Money in a Way That Works Best for You
To summarise, endowment plans are a savings plan with an insurance component. They may provide higher returns than savings accounts but they are riskier and there is a chance that you won't get back all the premiums you put in. On the other hand, savings accounts offer a low-risk, flexible way to save money over time. While at the core both products provide a way to save, digging further into their features shows that these plans are best fit for consumers with very different ultimate goals. 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.