Endowment Plans or Plain Old Savings: Which Should You Use?

Why get an endowment plan in Singapore when you can just save money? The answer depends on your goals. Here's why you would choose one over the other.

Endowment plans are everywhere in Singapore. These days, it seems like you can’t walk past an insurance booth without being offered three or four options.

The more traditional-minded among you may be wondering: what’s the point of endowments when you can just save money? Here are the differences you need to consider.

What is an Endowment Plan?

An endowment plan is a product that mixes insurance with savings.

An endowment plan costs you a certain sum every month (or every year in some cases), which is called the premium. After a certain length of time, which can be as short as two years or as long as 25 years, the endowment will provide a lump-sum payout.

This payout typically has two portions: a guaranteed sum and a non-guaranteed (variable) sum. The guaranteed sum is the amount you will definitely get, regardless of market conditions. The non-guaranteed sum depends on how well the endowment performs (a global financial crisis, for example, could drastically lower returns).

As a typical example, you may be asked to pay $350 a month for a 10-year endowment plan. This would be S$4,200 per annum, or a total of S$42,000 over 10 years.

At the end of those 10 years, the endowment plan pays out a guaranteed amount of S$40,000, plus a non-guaranteed amount of up to S$20,000. You could potentially make between S$6,000 and $18,000 over those 10 years, depending on how well the endowment performs.

In addition, you will be given a death benefit. This is a sum of money that your beneficiaries will receive, should you die before the endowment plan matures.

Which Should You Use - Endowment Plans or Savings?

Both are useful financial tools. Most Singaporeans would do well to use a bit of both. In general:

• Savings are better for unforeseen circumstances, whereas endowments are better for planned purchases
• Endowments provide better growth than bank interest rates
• Endowment plans have death benefits
• Savings provide greater flexibility

Savings for Unforeseen Circumstances, Endowments for Planned Purchases

Savings and endowments, while they may seem similar, actually serve different purposes.

Savings are used for emergencies, such as when you get retrenched and need a new job, or you need to pay a car mechanic S$3,500 for a new fan belt. Endowments can’t help you in these situations. When your money’s in an endowment, it’s stuck there until the endowment matures.

Some insurers may have special features that allow more flexibility, (such as a 'cashback' option, which allows you a yearly withdrawal) but for the most part you can’t touch the money.

Where endowments excel, however, are planned purchases.

For example, say you know you are going to buy your first house in 10 years. You know you’ll need at least S$70,000 in cash for the downpayment. A financial adviser can help you pick a five-year endowment plan that can provide sufficient returns.

As endowment plans grow faster than savings, you are more likely to reach your financial goals within the given time period.

Endowments Provide Better Growth Than Bank Interest Rates

Endowment plans usually project returns of between 3% - 4% per annum. This is much higher than a typical bank account, which usually pays out 0.125% per annum. Some banks do not pay interest on current accounts at all.

Even if you were to use fixed deposits, the interest rate from banks is seldom above one per cent per annum.

However, do note that the returns from endowment plans are not guaranteed. Speak to a financial adviser to analyse your risk profile, before buying.

Endowment Plans Provide Death Benefits

Savings do not, of course, come with any death benefits. This is the insurance aspect of endowment plans, which provide a layer of protection for your beneficiaries. The exact death benefit varies based on the plan purchased, and you will have to check it with your financial adviser.

Do consider, however, that your savings can be passed down to beneficiaries if you die. You may want to weigh this up against the guaranteed death benefits, before making a decision.

Savings Provide Greater Flexibility

If your income situation changes, you can choose to increase or decrease your savings as appropriate. The same is not true for endowments.

Even if you get a raise and make more money tomorrow, there’s usually no way to raise your contributions to an endowment plan. You’re stuck with the deal you chose at the beginning.

In the reverse situation, where you make less money, you will face greater difficulties; you’re still required to make the premium payments. This means you’ll either have to give up the plan (getting only the surrender value), or sell the plan (some companies may buy your endowment plan, but you will still lose money in the deal).

As such, it’s best not to commit to endowment plans with hefty premiums, unless your income is stable. If it’s not, you may want to consider a less ambitious endowment policy.

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