In 2021, Singapore was ranked the second most expensive city in the world by the Economist Intelligence Unit.
It is no wonder that many young working adults struggle to keep up with the rising cost of living. One way to keep up is to make sure your money grows too. That is where endowment plans come into play.
What is an endowment plan?
An endowment plan is a financial product that helps you grow your money over a fixed period of time.
It offers a combination of guaranteed and non-guaranteed returns on your money, while providing insurance coverage as well.
Endowment plans are often marketed as a way to help you save towards a specific financial goal, such as saving up for your child’s education.
Typically, you put in a sum of money over a fixed period of time. At the end of the period, you will collect a benefit, which usually yields more than the total amount you paid.
In Singapore, an endowment plan may also be referred to as “endowment insurance” since there is an insurance component tied to the plan.
Here are a few factors that define what endowment plans are:
Endowment plans have a fixed maturity date.
Depending on the plan you buy, the maturity period is usually between five and 20 years, though some may run longer.
The maturity period of your endowment plan should match your objective, so think about how long you can commit before buying one.
Fixed regular premiums / Single time premium
Endowment plans usually require you to pay a fixed sum regularly. This is called a premium. Premiums are paid either monthly, quarterly, semi-annually, or annually.
Some insurers also offer single premium payment plans, which means you pay the premium in one lump sum. Sometimes, a discount is offered in such plans.
But if you don’t have sufficient cash on hand, a regular premium plan may be more accessible.
Endowment plans usually come with insurance. But in most cases, the insurance coverage is insufficient, so do not use an endowment plan to substitute your life insurance plan.
Why get an endowment plan
Endowment plans help you to be disciplined as you work towards a life goal, such as putting your child through school, or being able to retire comfortably.
In Singapore, one of the most common reasons to get an endowment plan is for a child’s education.
Parents who buy an endowment plan tend to buy a fixed regular premium plan. When the plan matures, the payout is used to fund a child’s school fees.
Read more: How Much Education Actually Costs In Singapore and How You Can Afford It
People also often get an endowment plan to save for their retirement.
The key difference between retirement plans and education plans is the way payouts are disbursed when the plan matures.
Instead of a lump-sum payout, most retirement plans provide regular monthly payouts to policyholders once they hit a certain age. This payout comprises guaranteed and non-guaranteed returns.
A big draw of these retirement plans is that they guarantee you a retirement income. Regardless of how poorly the financial market performs, insurers are obliged to issue the payouts. Policyholders can also look forward to the bonus non-guaranteed payout — the exact amount depends on the performance of the fund the insurer participates in.
Read more: When Should You Start Planning for Retirement?
Saving plans are also one type of endowment plan. These savings plans usually have shorter commitment periods, sometimes as short as three years.
The primary purpose of these plans is to help policyholders save and earn an interest that is higher than what they would potentially earn in a regular savings bank account.
When to get an endowment plan
The best time to get an endowment plan is when you are in your mid-20s. At this age, there is still some time before you hit certain life milestones like marriage or buying a house.
It gets harder to save as a person grows older, as they have to take on more financial responsibilities such as caring for elderly parents or raising a family.
So why not start early and start saving when you have the means?
Endowment plans are an ideal way to start saving early because they force you to be disciplined and set aside an amount each month.
Even a small amount each month can make a huge impact later on as your money compounds.
Things to look for in an endowment plan
When it comes to getting an endowment plan, these are factors you should look at:
The amount of guaranteed returns
Ideally, your guaranteed returns should be higher than the total amount paid in. There is no point in buying an endowment plan if you cannot even earn back the premiums you paid.
The maturity date of the plan
Look at the consequences of liquidating or surrendering the policy before your maturity date.
Usually, you will not get more than the premiums you paid if you cancel prematurely. So make sure you get a plan with a time span you can commit to.
Buy an endowment plan, but also invest
Unfortunately, endowment plans yield very low returns in a low interest rate environment.
Getting an endowment plan alone is not enough. To grow your wealth, you need to invest as well. There are two main types of investments: Passive and active.
Passive investments refer to investments that do not need you to look at your portfolio frequently, whereas active investments require you to take a hands-on approach.
There is no right type of investment strategy. It depends on what you prefer and the time you have on hand. You can use robo advisors if you prefer a passive approach, or you can sign up for a trading platform if you have a passion for investing.
Read more: Endowment Plan 101: What to Look Out For?
In a nutshell
It is never too early to start saving. In fact, the longer you put it off, the further you are from your life goals.
Endowment plans are an easy way to ensure you put aside some money for your future.
The best endowment plans are the ones that meet your unique needs and priorities.
If you are unsure which ones to get, you should speak to a trusted financial consultant to discuss which endowment plan fits you best. You can always reach out to us at email@example.com for more advice.