An endowment policy is essentially a savings plan that has both guaranteed and non-guaranteed returns. Being a balance of security and investment, it provides reasonable coverage while investing your money, and offers a guaranteed lumpsum payout when the policy matures.
Let’s take a deeper look into the pros and cons of getting an endowment plan.
Compared to investing in the stock market, endowment plans are able to guarantee you returns – the amount depends on the product and the company. If you have been paying your premiums diligently, you will be guaranteed a sum of money when your policy matures.
Non-guaranteed returns can be seen as both a pro and a con. Endowment plans are able to generate higher, non-guaranteed returns for their policyholders. These non-guaranteed returns is dependent on the performance of the insurer’s participating fund. This additional, non-guaranteed returns make endowment plans more attractive than a regular fixed deposit.
Some endowment plans come with an insurance component offering death benefits, critical illness and even disability coverage on top of the guaranteed and non-guaranteed benefits offered by the policy. However, regular investment plans do not provide any insurance coverage in the event that the investor passes on.
This is the reason why endowment plans are popular among parents who would like to save and invest for their children’s education since there is a guaranteed fixed amount given to their child, regardless of what happens in the future.
Pursuing individual savings goal
Apart from the accumulating premiums, an endowment plan comes with bonuses. Depending on investment performance, your policy might have an annual bonus or a terminal bonus that pays out on maturity.
Limited access to your money
Endowment insurance policies require financial discipline. The money you put away into the policy as premiums is not easily accessible prior to the end of the policy term. It is important, then, to maintain liquidity while deciding on an endowment insurance product. Make sure your premium amount is an amount you can afford to pay on a regular basis. If you foresee any termination of the source of income you would rely upon to make premium payments, it may wise to put it off.
Guaranteed return does not equate to guaranteed principal
One major misconception to avoid when buying an endowment plan is to assume that the premiums you pay for the policy would automatically be guaranteed – that you’ll receive your premiums paid plus extra when the policy matures. This is not always true, as the guaranteed returns may be lesser than the premiums paid. However, the policy may have death benefit whereby if the insured passes on during the policy term, a lumpsum payout will be given. This may balance off the lower guaranteed returns.
At the end of the day, you’ll need to evaluate your reasons for purchasing an endowment plan.
Things to look out for when purchasing an endowment plan
Mr Lin also advises that you should look out for the company’s financial standing and the consistency of the performance of the company’s participating funds. One other thing that you should check for is some of the product features such as flexibility of withdrawals or coupon payment options.
While saving plans and endowment policies offer a better rate than bank deposits, prioritise the more important financial objectives and goals instead. Make sure your financial budget is sufficient to cater to the saving plan instead of overstretching and relying on any available cash back options. Before taking up any endowment plan, do speak to a licensed and professional financial adviser to know what’s the best option for you.