Endowment Insurance

Guide to Using Your Endowment Plan to Fund Life Events

Endowment insurance is a type of savings plan that has a life insurance component attached. You pay a premium every month (or year) similarly to how you would put money aside into a savings account. The only difference is that you can't slack off with endowment plans. If you fail to pay your premiums on time, your policy lapses. Because of this, people who want to be forced to save like the discipline endowment plans bring. However, beyond just acting as a savings plan for people, endowment plans can be useful for a variety of milestones. Below, we break down a few popular ways you can use your endowment plan to help pay for major expenses in your life.

Endowment Plans for Retirement Savings

If you want some additional money for retirement, you can consider getting an endowment plan. You can choose either a regular endowment plan that will give you a lump sum when the policy matures or go for a retirement savings endowment plan, which is more catered to retirement. These tailored plans let you choose your retirement age and then they will pay out a monthly sum that is made up of a guaranteed portion and a non-guaranteed bonus portion (in a similar manner to your CPF, except you can take out as much as you want in certain cases). You will typically be able to choose which sum you want to receive, making it easier to save for the retirement lifestyle you envisioned.

Besides paying out a monthly portion of your sum upon retirement, retirement endowment plans also offer a variety of benefits. For instance, if you were to become disabled and unable to do certain activities of daily living (ADL), you can also receive additional income on top of your guaranteed sum. You may also be able to pay for your premiums through your Supplemental Retirement Scheme (SRS) funds. Lastly, some plans offer an opportunity to reinvest revisionary bonuses back into the plan. If you choose to do so, you will get an additional monthly payout on top of your guaranteed payout and bonuses.

Example:
  • You are 40 and want to save for retirement. You settle on Aviva MyRetirementChoice
  • You pay a premium for 15 years and choose a retirement age of 62
  • Between the ages of 62 and 85, you decide you would like an additional S$1,000 per month.
  • After paying premiums for 15 years, the policy will continue to accumulate for 7 additional years until your retirement age
  • You will receive a lump sum bonus that can be reinvested for a higher monthly payout or used to pay for other expenses
  • Between the ages of 62 and 85, you will receive monthly payouts made up of the guaranteed monthly income (S$1,000), monthly cash bonuses and additional monthly income (if bonus was reinvested)

Endowment Plans for Education Savings

Endowment plans are also commonly used as a way to save for your child's tuition or education expenses. Similar to retirement plans, you can either use a traditional endowment plan or look for an education savings plan. These plans will let you save for a number of years until your child turns a certain age. These plans also pay out a few times before your plan's maturity date and 3-4 times after (one for each year of university). On average, the payouts range between 20-50% of your sum assured, although they can be as small as 5% if you are getting a cash benefit before the maturity period. Knowing the payouts ahead of time can make it easier for you to adjust the sum assured and reduces the chances of saving too little.

Example:
  • You just had a child and you want to get a head start on their education savings
  • Using Manulife Educate, you decide you'll need S$30,000 to fund your child's education
  • You pay premiums for 10 years and choose a payout age of 18
  • If you buy the policy when the child is just born, you'll have 6 more years (until your child is 16) where your money accumulates
  • When your child turns 16, you can withdraw 5% of your sum insured for miscellaneous expenses like a laptop or extra courses
  • Once your child turns 18, you will receive 20-40% of your sum insured over the course of 4 years to fund their university expenses
  • Upon policy maturity, you may receive a bonus

Endowment Plans for Life Events Like Weddings or Down-Payments

Some endowment plans are short-term, with policy terms between 3 to 7 years. This makes them attractive to people who have large expenses in upcoming years, such as a wedding or a mortgage/car down payment. These shorter term plans also have a shorter payment term— either a one-time lump sum or a premium payment period of 2 years. Due to this, you would have to transfer your current accumulated savings into an endowment plan to receive the greatest benefits. To reduce the risk of losing your hard-earned money, you should look for plans that provide a 100% capital guarantee and a guaranteed return. For very risk averse customers, a non-participating plan would be the best option, as it will provide guaranteed returns only. However, those who can handle a bit of risk and want to see greater returns than they would with a typical savings or fixed deposit account, a non-participating option that provides bonuses may be a better option.

Example
  • You just got engaged and you are planning your wedding. You've been saving for a while already but you want an extra boost in your savings
  • Using Tiq's 3-Year Endowment Plan, you use your current savings of S$25,000 as a one-time premium payment
  • With a current maturity yield of 2.10% p.a., you will get an extra boost of S$1,608 after just 3 years of saving

Things to Note

Endowment plans are not without risk. Thus, before you decide to get one, you should be aware of a few of their drawbacks. First, not all endowment plans provide a positive guaranteed return on your premiums. In some cases, your guaranteed returns will be less than the total premiums you put in, leaving you in the hands of the insurer's fund performance. If the insurer's fund performs poorly, you may end up losing money, which defeats the purpose of an endowment plan entirely. Because of this, we advise only looking at plans that provide a 100% capital guarantee. This ensures that when your policy matures, you will get back at least all the premiums you put into the plan. If you are curious about the plans that are currently available, check out our guide to the best endowment plans on the market.

Next you should note that once you are locked into an endowment plan, you should hold it until maturity. Otherwise, you will risk losing money due to surrender fees. This means you should be committed to the policy period you chose. This is slightly easier to do with education and retirement funds, which have a longer time frame and are set up to accommodate most people's life events, but can be harder when you are saving for an event that is subject to change (such as a wedding, honeymoon or car purchase).

Endowment plans also contain a life insurance portion. So unlike fixed deposits or savings accounts, where 100% of your money goes towards your savings, endowment plans split your premiums between the savings portion and paying for the life insurance portion. If you don't need the life insurance coverage, then you may find traditional savings options like savings accounts or fixed deposits more suitable. However, if you like the idea of having an emergency backup if something unexpected were to happen, then your endowment plan's death and disability coverage could be useful.

Lastly, you need to take a look at the insurer's investment rate returns and expense ratio. They can help you determine which insurers are financially healthier and can give you a better spread on your bonuses. The expense ratio is important because it tells you how much it costs to invest in your insurer's fund. However, you should note that your premiums are calculated to include that cost, so you won't have to pay any extra fees for investing in an endowment plan. Nonetheless, you still want to consider the expense ratio when choosing a plan as it might affect your bonus. Preferably, you'll be looking for an insurer that has a low expense ratio, healthy credit rating and a higher historical return on investment. Do note though, that past performance is not indicative of future performance.

This graph shows the average 5-year expense ratio of major insurers in Singapore. Income has the lowest at 0.8%, while AXA has the highest at 9.29%
Anastassia Evlanova

Anastassia is a Senior Research Analyst at ValueChampion Singapore, focusing on insurance. She holds an International Business Management diploma and a B.A. in Economics from New York University. Her prior working experience includes work in the capital markets sector.

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