Endowment plans, more commonly known as a insurance savings plan in Singapore, can be a useful instrument when it comes to planning for one’s financial goals.
Some goals that one may plan for include, their children’s university education and for their retirement as these generally happen at certain ages.
Before deciding which is the best endowment insurance plan, it might be good to understand what types there are, and how they work.
3 Types of Insurance Savings Plans
There are 3 broad types of insurance savings plan in the market, and they can be classified as follows:
- Traditional – The most basic form would require the consumer to commit a regular premium for a fixed number of years. After which, the policy matures and a lump sum is paid out to the policy owner rewarding them for their discipline in saving.
- Anticipated – Such policies have some sort of flexibility where the owner will have the option of using a “coupon” or “cash back” (during the premium term) to re-invest in and continue growing your money, or to use it for your personal expenses. These coupons usually commence at the end of the 2nd year onwards.
- Perpetual (Or “Whole Life”) – The main difference between a perpetual and traditional policy is that the policy will continue to be invested and grow, until one decides to surrender the policy or they turn 100/120 years old (depending on the solution chosen). Another benefit is the option to appoint a secondary life assured, which means that if the primary assured passes on, the policy will continue accumulating until the secondary person surrenders the policy.
The maturity amount is lower even if one decides to accumulate all their coupons every year when comparing an anticipated policy against a traditional one. This is because of the flexibility given on being able to use the money should the need arises. More flexibility equals potentially lower returns in this case.
Assuming the perpetual policy is kept till maturity, it would have the greatest returns as the capital invested would have a longer period to grow.
With Company A, the premiums are paid for 25-years with the policies either maturing or the perpetual endowment being surrendered on the 25th/35th year. Premiums are paid for 20-years with Company B instead with the policies maturing on the 25th year while the perpetual endowment is surrendered on the 25th/35th year.
If you have a specific goal, such as planning for a child’s university education, then a traditional endowment policy may make sense.
Whereas, if you have a longer term goal which you are unsure of, or wish to pass on the policy to your children, then a perpetual endowment policy may make more sense.
Flexibility Or Not?
Anticipated endowment plans are commonly pitched at banks and at roadshows (until Covid-19 ends) and are usually taken up because of the flexibility feature that is highly focused on.
They may be phrased as “cashback”, “rewards” or “bonuses” if you take this yearly coupons. While in fact, this is similar to withdrawing money from the bank or your investments, which prevents you from setting aside more money for your future.
There are also agents who un-ethically recommend their clients to use these yearly coupons to offset their premiums the following year so that they have to set aside a smaller amount. This puts more money in their pockets, and lesser in yours for the future.
I run through a few simulations and compare them to see if the concept of flexibility makes sense to a consumer like myself.
- Setting aside $6,000/year for a traditional endowment policy
- Setting aside $6,000/year for an anticipated endowment plan
- What if I decide to accumulate my premiums without ever using the yearly coupons
- What if I use the yearly coupons to “offset” the premiums the following year
- Taking $6,000/year and subtracting the yearly coupons ($6,000 minus X) to get a traditional endowment policy instead
As the coupons are usually paid at the end of the 2nd year, it will be used to offset the premiums from the 3rd year until the end of the premium paying term. For Company A, the nett premiums are calculated as follows:
[($6,000 * 2) + {($6,000 – $2,539) * 23}] = $91,601
When we compare this technique against a traditional endowment with a lower commitment, the numbers still make more sense for the traditional policy. Both figures, guaranteed and total are more when we factor in the difference in premiums paid.
Factors to Consider:
- Capital Guaranteed / Non-Guaranteed – When making comparisons, focus is only placed on the total figures and not to consider the guaranteed amounts. In some cases, the guaranteed amount at maturity is less than the total premiums paid. While the insurers do their best to pay the higher projected amounts, they are not contractually obligated to (non-guaranteed), as it is dependent on how their investments perform in the long-term.
- Waiver Riders – Adding this onto your policies would allow you to stop paying future premiums if a trigger event occurs, at an affordable cost. Some companies may not offer any waivers at all, while others do. Such riders help alleviate stress should one be unable to pay their premiums under certain circumstances.
- Certainty of Goals – If you are certain of the goals you would like to achieve at given ages, then a traditional policy may give you a better result than a perpetual. Otherwise, if you are uncertain as it is “too far away”, then a perpetual endowment insurance plan may make more sense.
- Flexibility – Do you require flexibility? If not, you may consider a traditional policy. Otherwise, starting with a smaller amount instead may benefit you more than an anticipated plan which “rewards” you with flexibility.
Common Misconceptions About Endowment Insurance Plans
A common misconception is that they would pay out a significant sum in the event of death, disability or critical illness. However, policies these days only pay an additional amount (usually 5%) of the premiums paid so far. Hence, it is important to plan one’s Life Insurance needs separately from such policies.
The age at which one commits to an endowment insurance policy does not affect the premiums or returns too. However, the waiver riders are dependent on entry age and one’s health status.
While the insurance savings plan may suit more risk-averse profiles, they are also a good tool when it comes to planning for long-term goals holistically.
As one approaches nearer to their goals, such as retirement, they may not want to take as much risk compared to their younger days. One of the methods is by selling their investments (take profits) and placing them into endowment plans, which have minimal to no fluctuations.
Therefore it is important to consider all your available resources before deciding how to re-allocate them.
Current options in the market which I am partnered with and am able to do a comparison for you include:
Traditional:
- China Life FlexiCash Growth
- China Life SaveForward Endowment Plan II
- China Taiping i-Saver8
- NTUC Income Gro Power Saver
- NTUC Income Gro Saver Flex
- Singlife Choice Saver
Anticipated:
- AXA Savvy Saver (II)
- China Taiping i-Cash III
- Manulife Spring (II)
- NTUC Income Gro Cash Flex
- NTUC Income Gro Sure Saver
- Singlife Steadypay Saver
Perpetual / Whole Life:
- Etiqa Enrich Flex
- NTUC Income Gro Saver Flex
- Manulife ReadyBuilder (II)
- Singlife Choice Saver
If you would like a comparison to find out which is the best insurance savings plan Singapore has that matches your needs, fill up your contact information here and I will connect with you.