Guide to Understanding Your Endowment Insurance Plan
Endowment insurance is primarily a savings plan that also provides a bit of life insurance coverage. Most plans are term plans, meaning they will mature in a set number of years and provide a lump sum payout. Endowment insurance plans are advertised as a form of "forced savings" because you are obligated to pay premiums if you want to keep the policy active. However, unlike typical savings plans you'd find in banks, endowment policies are complex insurance products that have a lot of components you'll need to fully understand before committing to a policy. Below, we break down and explain the features found in endowment plans so you can better understand your policy.
Table of Contents
- Understanding Your Policy
- Understanding Your Returns
Understanding Your Policy
Endowment policies come with a lot of terms and conditions that may not always be obvious to the reader. We break down some common terms you may find when comparing different endowment plans.
Illustrated rates are set by the Life Insurance Association and are currently set at 3% and 4.25%. They are estimates of the long-term returns of a participating policy. They are used in hypothetical policy illustrations to show the volatility of the non-guaranteed benefits and show how much a particular policy can accumulate by the time it matures (aka the illustrated yield at maturity). Since these rates are used just for illustrative purposes, they don't represent the upper and lower limits of the investment performance. Thus, the actual investment returns on your policy may be higher or lower than these rates.
Some policies offer the opportunity to withdraw a certain amount of money per year after your policy acquires cash value. The amount you can withdraw is typically a percentage of the sum assured. Some plans, such as retirement savings plans, include a non-guaranteed bonus portion on top of the guaranteed cash payout amount. Sometimes, there will also be an option to reinvest your cash benefits at a certain percentage. You should note that the percentage rate is the prevailing rate and may be changed.
Unless you have a retirement plan or an education plan, where the cash payouts are integral to the policy, it is much better to reinvest the cash payouts. This is because as you withdraw from your policy, you are decreasing the sum assured and effectively decreasing the total amount you will receive when the policy matures.
Total Distribution Cost
The total distribution cost is the cost that the insurer paid to its distribution channel (i.e. commissions). It lets you know how much you paid for the advice of your financial advisor who sold you the policy. This cost is already included in your premium.
100% Capital Guarantee
Sometimes when you are comparing policies, you'll notice that some insurers advertise plans that have a "100% capital guarantee". This simply means that your policy at maturity will be worth at least 100% of the premiums you put into the plan. This is a valuable feature because it is possible to have guaranteed payouts that are less than the total premiums paid. Since you can't depend on the non-guaranteed bonus to make up for the difference, this benefit can bring peace of mind that you won't lose money over the long run.
Understanding Your Returns
Your endowment policy return will be made up of a number of components. It will also change depending on the type of policy you have and when you decide to cash in. Below, we explain the different terms surrounding your payout so you can better understand your endowment policy's returns.
The guaranteed value is the guaranteed amount you will get when your policy matures. It may be a predetermined amount that you specified when you bought the policy or it can be an amount designated by the insurer. In some cases, the guaranteed sum may be less than the premiums paid over the term of the policy. This is because a portion of your premiums goes towards paying for the life insurance portion of the policy. To ensure you will get back at least 100% of your premiums, we recommend looking for policies that offer a 100% capital guarantee.
If you have a participating endowment policy, you will be eligible to receive non-guaranteed bonuses on top of your guaranteed maturity sum. These bonuses are affected by factors like the performance of the investment fund, the expenses incurred by the participating fund and death or sickness claim payouts for policies participating in that fund. There are two types of bonuses in participating endowment policies: reversionary bonuses and terminal bonuses.
Reversionary bonuses are added regularly to your policy. Once this bonus is declared and added to your policy, it increases the total sum assured and can't be taken away or reduced. Your insurer's policy documents may provide a numerical value for their reversionary bonus (i.e. S$7 per S$1,000 sum assured). This means that for every S$1,000, your bonus will add an additional S$7.
Terminal bonuses are added once when the policy matures, you make a claim or when you surrender the policy. It is calculated on top of the reversionary bonus.
The surrender value is the amount you'll get when you choose to terminate the policy early. There are two portions to the surrender value in a participating policy, the guaranteed and the non-guaranteed portion. The guaranteed portion will be the guaranteed amount of your policy and the non-guaranteed will be the bonuses you've accumulated during the duration of the policy. You should bear in mind that the surrender value will typically be lower than the premiums you paid.
The maturity value is what you will get back when the policy matures. This will consist of the guaranteed sum and all the non-guaranteed bonuses (if you have a participating policy).
Endowment policies also come with a life insurance portion. This means throughout the duration of your policy, you will be covered for death, terminal illness and sometimes total and permanent disability. If you die or get diagnosed with a terminal illness the policy will pay out a benefit that is typically 105% of the premiums paid (up until the death) and any bonuses that have accumulated. The terminal illness benefit will be paid as a lump sum as an extension of the death benefit.
One thing to note is that the life insurance portion of an endowment plan is not comprehensive. If you are looking for large amounts of life coverage, we recommend that you look at life insurance policies. Alternatively, if you find yourself not needing life insurance coverage at all, you may be better off with a different type of savings option since some of your premiums will go towards paying for the life insurance portion.
Endowment Policies Are Not Without Risk
While endowment policies may provide great returns, they are not without risks. First, they require long-term commitment as a lot of plans come with terms between 10 and 25 years. If you choose to surrender your policy early, you may lose some or all the premiums you paid. Furthermore, your returns depend on the insurer's fund. If the fund performs poorly, that will be reflected in your sum assured. Because of this, we recommend speaking to a financial advisor about your options. If you believe an endowment policy may be a fit for you, you can read our guide on how to pick the best endowment policy or compare our top picks for the best endowment policies in Singapore.