What are Savings and Endowment Plan?

A Thorough Comparison & Analysis

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Endowment plans are a relatively popular product type that is often purchased for investment reasons by Singaporeans. Numerous types of endowment plans are available, including the notorious investment-linked insurance.

Savings are a significant element of any personal finance plan along with investment and insurance. If you can save consistently, you’d have enough money to plan for the future, instead of continuing to live from a paycheck-to-paycheck.

There are many ways to kickstart a habit of saving. A traditional way is to accumulate money in a savings account in a bank. However, the inflation rate is currently at around 1.7% a year. Thus, you can either put it in your savings account and lose in value over time.

Another method you can use to build up your savings is through the use of a savings plan, having an assured that you will have a sum of money when it reaches maturity.

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Are Endowment Savings Plan same as Bank Savings Account?

No. Savings plan should not be mistaken with a bank savings account. The savings plan is a financial product you acquire to increase your savings over a set period of time. On the other side, a savings account is a bank account where you have surplus cash.

Unlike a savings account, where you can withdraw at your discretion, a savings plan is more structured, requiring you to commit to the plan you purchased for a set timeframe. At the same time, you shouldn’t confuse a savings plan with an investment plan such as “Regular Saving Plan”. 

Is Investment-Linked Policy (ILP) similar to Endowment Savings Plan?

An endowment plan pays you an annual reversion bonus which is guaranteed once declared from the performance of the participating fund in which the insurer(insurance company) invested.

And Investment-Linked Policy (ILP) would mean your policy will be investing in Unit Trusts and a fluctuating Net Asset Value (NAV). They are typically more flexible and at the expense of not having a guaranteed amount, but you can attain much greater rates of return than endowments.

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The newer version (Back-End Loading) ILP allows you to deploy 100% into investments. As they deal with investments, past performance does not indicate further results and there is always a possibility that you may lose your capital.

While both endowment and Investment-Linked Policy (ILP), they have guaranteed and non guaranteed figures. Only endowment has guaranteed figures which are guaranteed to be given when the plan reached maturity. This is where the differences lie.

Why should we invest in Endowment Savings Plan?

 
  • Thus, you can either put it in your savings account and lose in value over time.
 
  • Or you can start with something easy and develop the right mindset – passive and long investment horizon.

It’s not about quitting your work or early retirement, but having the choice to do so. It is about becoming financially self-sustainable without depending on the work. Such an option allows you to live your own life, and isn’t that what most individuals dream about?

Money is more valuable today than tomorrow. Economists call this “Time value of Money”. Your surplus cash must be located in your wallet or bank accounts somewhere. But the major issue is that both don’t offer the yields that can affect your wealth. By making use of compounding interest effect, your financial capital accumulates and rises over time. That’s why it’s so important to put your money to work. In the below illustration, you will see why starting investment into endowment savings plan early is an advantage.

One-Stop Financial Endowment - Compounding
One-Stop Financial Endowment - Compounding 2

Your money’s value drops over time, you purchase less than you can. Whenever you work, eat and sleep, it’s like falling coins. In Singapore, the average level of inflation is 1.7% and the average rate of savings is less than 0.5%. That means you’re losing 1.7% every year! By the time you’re 60, you will have lost over 60% of your wealth if you don’t invest. That’s a pretty good reason to invest in something which has a higher interest if you ask us.

Based on #2 and #3, you can experience either of the two:
– Positive Exponential Growth: If you are above the inflation rate, over the years your money will grow and snowball into a much larger sum.
– Negative Exponential Growth: If you are in the negative range, over years you will sink deeper into debt.

One of the primary reasons why our learners approach us is to invest in a retirement plan. Many are concerned that their savings (including CPF payout) can not give them the lives they want when they retire.

What are the types of "Savings Plan"?

Before you think about getting an endowment plan, perhaps it is best to first understand what an endowment plan actually is.

One-Stop Financial Types of Saving Plan in market

How does savings plan work?

These plans are generally organized in a comprehensive way, and while the benefit illustration should obviously clarify the benefits, investors who want to purchase these plans often fail to comprehend them. They rely on their financial advisor to explain the benefits to them.

No matter how much you trust a financial advisor before you commit to it, you must know the product.

Types of premium frequency

Requires one to make an upfront payment – that is, pay the entire premium for the policy in one shot.

Would require payment at regular intervals be it annually, bi-annually, quarterly, or monthly.

Participating vs
Non-Participating endowment

  • Provides both guaranteed and non-guaranteed benefits.
  • When you surrender your policy, you will only receive the cash value of the guaranteed and vested bonuses.
  • Guaranteed maturity values and cash values.
  • Non-participating policies may not have any cash value (surrender value).
One-Stop Financial Infographic Savings Plan Endowment - How does Savings Plan Work

How do you read benefits illustration chart?

There are several columns that require your attention in the Benefits Illustration of the plan produced for you by your financial advisor

One-Stop Financial Endowment - Chart Reading

Difference between Guaranteed and Non-Guaranteed maturity value

– What the insurance company is required to return to you is the guaranteed part of the policy, regardless of how poorly the investment portfolio has done.

– It is extremely important to note that the guaranteed portion of certain policies may be lower than the premiums you put in. Not all policies are created equal.

– The policy’s non-guaranteed component is the additional returns that you may receive if the portfolio performs well.

– The return rates shown in the benefit illustration will be pegged respectively at 3.25% and 4.75%. This is industry-wide standardized and regulated by MAS.

– The most important part of the plan are the guaranteed returns as the insurance company is required to return to you is the guaranteed part of the policy.

– Some of the endowment plan’s premiums paid to-date (the total amount that you paid) is LESSER than the guaranteed portion. Thus, it is useful to compare the guaranteed portion of the plan versus the premium paid, to see how much you are not going to get in the worst-case scenario.

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Let us work on a REAL case study example...

Below are two examples of two different company with a similar apple-to-apple comparison:

  • A 25-year endowment savings plan (25 payment years)
  • Total of premiums paid to-date around $60,000
  • No payout/withdrawal coupon

Company A Plan:

One-Stop Financial Endowment - Compare 1

Company B Plan:

One-Stop Financial Endowment - Compare 2

Which plan will you pick? The plan from Company A or Company B?

Company A’s plan the guaranteed portion is LOWER than the amount you paid (total premiums paid to-date).
This also means that you are only guaranteed to take back $36,000 when you paid about $60,000 in premiums for Company A’s plan.

In comparison, Company B’s plan guaranteed portion is HIGHER than the amount you paid (total premiums paid to-date).

Company B’s plan is the type of endowment plans that you should be getting. If unsure, you can get in touch with us to help you to compare.

What are the common types of Endowment Savings Plans in the market?

Insurance companies launched various plans with different structure in an effort to make endowments. Below are the types of savings plan in the market. The first 4 types of savings plans are the most commons in the market.

One-Stop Financial Types of Saving Plan

Is Cash-Back option worth?

Insurance companies launched plans with payouts in an effort to make endowments more appealing which some has feature payouts that can be either reinvested or withdrawn for your other purposes. They may come in different terms such as Flexible Cash-Back, Guaranteed Cash-Back, Guaranteed Cash Benefit or Guaranteed Coupon Payout.

One-Stop Financial Endowment - Choice of flexbility

However, is the flexibility truly a good thing? Let’s have the math do the talking

One-Stop Financial Endowment - Cash Back Option
One-Stop Financial Endowment - No Cash Back Option

Cash-back flexibility may not be the best thing

  • The reality is that the Cash-Back Coupons are from the premium paid.
  • Your plan’s maturity value will fall due to the distribution of part of the cash-back from the maturity value in advance.
 

As you can see, the guaranteed portion of the two plans shown above is similar. But when you opt for the “Cash-Back” benefits, you will be given a lesser “Investment returns”:

With "Cash-Back Option", the overall amount at maturity for:

  • 3.25% = $62,075 (Total Cash-Back $31,625 + Guaranteed $12,375 + Non-Guaranteed $18,075)
  • 4.75% = $69,410 (Total Cash-Back $31,625 + Guaranteed $12,375 + Non-Guaranteed $25,410)

With "No Cash-Back Option", the overall amount at maturity for:

  • 3.25% = $68,446 (Guaranteed $44,000 + Non-Guaranteed $24,446)
  • 4.75% = $83,746 (Guaranteed $44,000 + Non-Guaranteed $39,746)

You can see that there is a trade-off between flexibility and returns on maturity as having payouts at regular intervals gives you reduced returns when the plan matures. Even with the same amount of premiums paid, at the end of the policy term, the internal rate of returns may differ, especially when you are saving towards your financial goals.

Why should we get endowment savings plan?

Before you think about getting an endowment plan, perhaps it is best to first understand what an endowment plan actually is.

There are few purposes towards the different variety of savings plan:

Most financial advisers are marketing endowment plans. In the pitch of sales, the word “forced savings” is often used.

– You can expect to contribute a regular amount to the plan for a specific period of time when you enrol an endowment plan. Alternatively, there are also single premium plans where at the beginning of the policy you put in a lump sum amount.

Financial goals such as owning a house, car and marriage etc which requires a huge sum of money. Endowment plans allow you to have consistency in saving for those goals.

Retirement, a good way to prepare for it and to boost the amount of savings you have when you’re about to step into retirement, ensuring you to have a stable source of income after retirement.

Higher education is usually quite expensive. Endowment plans offer predictability by letting you plan it such that they mature just as your child begins tertiary education. 

The main difference between an endowment plan and saving money in a bank account is the investment component of the plan.

The insurance company will take advantage of the premiums you contribute to investing in the financial product range. The goal of this is to gain greater returns.

– Endowment plans may include a portion of insurance at times. These plans would provide the policy with a sum-assured tag. This offers the policyholder with a payout in case of death or permanent disability.

But since endowment plans are primarily for wealth growing purposes, relying on them to provide cover protection would not be a good idea.

In conclusion...

Endowment savings plan discipline those who otherwise may not save for their financial objectives. You have to find out which plan at your specific stage of life is the suitable one for you. 

Comparing endowments with investments is the same as comparing apples with oranges at the risk of sounding cliched. Both are fundamentally different asset classes with varying risk and structure levels. In addition, both are used for different reasons.

One the beautiful thing about endowments is that getting guaranteed returns means you’d still have an amount of cash at the worst of economic periods, as compared to investing where your cash might possibly crash if the stock market goes wrong.

Get your Savings (Endowment) Plan comparisons from the top providers in Singapore here!

To have detailed customised planning with a good endowment plan with high returns, then take the first step to compare the different companies’ Endowment Savings Plans.
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