Understanding Endowments in 5 Simple Steps

Saving up for a future expense may seem like a daunting task especially when the costs involved are a sizeable amount. Moreover, with inflation driving up the cost of living, we may then require more for our financial obligations in the future. As shown in our article "How Much Does It Cost To Live In Singapore 30 Years From Now?", we projected that the cost of food could double in prices 30 years later. This shows the impact that inflation has and further emphasizes the need for saving plans that can prepare us for these future expenses. As such, if you are looking to enjoy passive income while saving, consider an endowment policy.

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What are Endowments?

Often seen as a disciplined way to save, endowments can be seen as a savings plan that can help us to achieve our financial goals. Upon maturity, cash values comprising of both guaranteed and non-guaranteed components are paid out to the policy owner. With premium payment terms starting from just 5 years, it allows for the flexibility of having a shorter time frame to accompany a longer maturity period. Also providing protection, endowment policies provides basic coverage with additional add-on riders available should you wish to enjoy a more comprehensive coverage.

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#1 Your Financial Goals

Knowing what you have and your saving intentions are an important step in financial planning as it helps you to determine your financial goals. Be it saving for a retirement, your child's education or even your dream house, an endowment policy could be used. Generally used for long-term financial goals, being clear on your intention will help to determine the suitability of the product. To begin, identify your saving goals before using a calculator to estimate the current shortfall.

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#2 Time frame

While endowment policies offer maturity terms that ranges from 10 to 25 years, premium payment terms are usually shorter. Starting from just 5 years, policy owners can choose a term duration that they are comfortable with. Similarly, maturity terms are also flexible and can be selected according to your preferences. This is important as awareness of the maturity and premium payment terms would allow you to opt for a policy that complements your financial goals. For example, you may consider a 20 year maturity term if your endowment is intended for your retirement. Alternatively, a shorter 10 year maturity may be considered if you are looking to save for your dream house or to provide for your child's education. Therefore, knowing the timeframe of your financial goals would help to identify the suitability of endowment policies.

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#3 Capital Guaranteed

While the prospects of high returns may seem attractive, it is imperative that the differences between the guaranteed and non-guaranteed cash benefits are properly understood. For example, if the guaranteed sum shown is equal to or more than your total premiums paid, your policy would be capital guaranteed. This would ensure that your pay-out upon maturity is more than your initial premiums paid and therefore fulfils your saving intentions.

Additionally, endowment policies also include a projected maturity benefit that is non-guaranteed. This refers to the additional bonuses received upon maturity and is based on projected returns that may differ from the actual amount received.

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#4 Cash Benefits

A fixed amount that is paid out to policy owners yearly, these cash benefits are guaranteed and are usually paid out from the 2nd year onwards. Offering policy owners access to some of their savings, these cash benefits can also be kept with the insurer to enjoy up to 3.75% non-guaranteed interest per annum. This thus allows the flexibility of either using the cash benefits for personal uses or to accumulate them with the insurer to enjoy interest rates and a larger maturity benefit.

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#5 Riders

Endowment policies typically provide basic coverage with additional riders available should you wish to enhance your protection. For example, a critical illness premium waiver rider could be attached to an endowment policy thus allowing the policy owner to have his/her premiums waived should he/she be diagnosed with a critical illness. This allows the policy to be in-force up till maturity and thus ensures that the policy owner would still achieve his/her financial goal.

However, it is important to note that premiums paid for the rider(s) do not have cash values and would would not accumulate any additional bonuses. Therefore, it is important that you are well-informed of your options and their underlying conditions so as to ensure that your policy is appropriate for your needs.

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How FSMOne can help you get on track

Our team of friendly advisers are able to help you review your financial objectives, long term commitments, and offer you investment and insurance advice specific to your needs. If you would like assistance in reviewing your financial and protection portfolio, or simply to get a quote for an insurance plan, you can contact our advisers at advisory@fundsupermart.com.

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