Endowment plans in Singapore – how do they work?

“The right endowment plan for you should be based on a holistic financial plan that enables you to achieve financial wellness through a realistic budget, adequate insurance, and investing to make your money work harder, as well as home, retirement, and estate planning,” explained the banking and financial services giant DBS.

Read more: AXA Singapore boosts offering with customisable plans

What is an endowment plan?

Most endowment plans are offered as part of whole life insurance policies, which usually provide lifetime coverage.

MoneySense, Singapore’s national financial education programme, describes endowment plans as bundled products that provide investment returns and protection coverage. Because of these features, such policies also require higher premiums.

Personal finance marketplace MoneySmart adds that due to this nature of endowment plans, policyholders view their whole life insurance coverage as an investment or savings plan instead of just a “plain old protection plan.”

How do endowment plans in Singapore work?

An endowment policy works as a hybrid type of plan that combines an investment component with insurance coverage. This is the reason why most plans are sold by insurance companies.

In an endowment plan, a portion of the premiums goes towards a policyholder’s life insurance, while the rest is allocated for investment.

“Endowment policies can be a beneficial way to help you build up financial discipline since the savings component is built into the monthly insurance premiums,” MoneySmart explained. “So, picking a suitable endowment policy may be a crucial step to a better savings plan.”

In terms of protection, endowment plans cover death, terminal illness, and sometimes total and permanent disability, with a coverage period up to end of life.

Some policies also allow the insureds to withdraw a certain amount of money annually after the plan has built up cash value. Others, like retirement savings plans, come with a non-guaranteed bonus on top of the guaranteed cash payout.

“As the main objective of an endowment plan as part of a whole life insurance policy is to provide overall protection and the potential to grow your savings, you can expect to receive some cash benefits,” MoneySmart added.

Read more: Singapore life insurance sector closes 2020 with positive growth

Endowment insurance plans come in several types. These are:

1. Participating endowment policies

A participating plan is where part of the premiums is invested in a participating fund and pays out bonuses or dividends, which are determined by the performance of the fund.

“Bonuses or dividends are not guaranteed as they depend mainly on the investment performance of the participating fund,” MoneySense noted. “When you make a claim, bonuses or dividends which have been declared will be paid in addition to the sum assured.”

The group added that endowment policies also have cash values that build up after a certain period, but the amount differs between plans.

2. Non-participating endowment policies

A non-participating plan pays a guaranteed sum at the end of the policy term.

3. Anticipated endowment policies

Available as participating and non-participating policies, anticipated plans work the same as regular endowment insurance except that a portion of the sum assured is paid at pre-specified intervals during the term of the policy. The remainder, along with the accrued bonuses, is then paid when the policy matures.

As regards policy terms, short-term endowment plans are active for between two and six years, while mid- to long-term policies last for 10 to 25 years. Typically, the longer the policy term, the higher the interest rate and returns earned.

Read more: Singapore life insurers report sales rebound

What factors should Singaporeans consider when taking out an endowment plan?

When looking for an endowment policy that fits their needs, there are several factors that Singaporeans should bear in mind, according to MoneySmart. These include:

1. 100% capital guaranteed

Only a few life insurance companies in Singapore offer 100% of the capital back when the policy matures, so it pays to shop around. Choosing this type of plan can help prevent policyholders from losing savings in the long term as some policies offer guaranteed payouts that are less than the total premiums paid over the years.

2. Total distribution cost

This is the portion of the premium that goes towards the insurer’s distribution channel. According to MoneySmart, it helps to know the specific amount, which is essentially the price the policyholder pays “for the convenience of getting advice from a preferred financial advisor,” as it prevents them from overpaying for a particular service.

3. Limited pay period

An endowment plan with a limited pay period means the policyholder pays premiums only for a certain period in exchange for a lifetime’s coverage. Depending on the policy and insurance provider, the insured may also be entitled to some accumulated cash value if they decide to surrender the policy after reaching a certain age specified in the terms and conditions.

4. Surrender value

Unlike in a term life insurance plan where policyholders do not receive any payout when they opt to terminate the policy early, an endowment policy often gives some cash value back through guaranteed and accumulated non-guaranteed bonuses. The surrender value, however, will typically be lower than the premiums paid.

5. Accumulated bonuses

There are generally two types of accumulated bonuses. Accumulated reversionary bonuses, which are added regularly to the policy and increase the total sum assured, and accumulated terminal bonuses, which are added once the policy matures or when the policyholder makes a claim or surrenders the policy. Terminal bonuses are calculated on top of reversionary bonuses.

6. Withdrawing from the policy

Some life insurers offer the option to reinvest cash benefits at a certain percentage after the endowment policy builds up cash value. According to MoneySmart, this percentage rate is the prevailing rate and may be changed, so if policyholders have a retirement or education plan where the cash payouts are integral to the policy, it is better to reinvest the cash payouts instead of withdrawing before the policy matures. The reason is that withdrawing from the policy decreases the sum assured, which means the total amount the insured will receive will also be reduced.