Whether you are a young aspirer looking to carve your own path, a couple building a future together, or a parent nurturing dreams for your children, the concept of securing your financial future is something that should not be ignored. If you have been exploring the market for savings and investment plans, there is a high chance that you have come across endowment plans. What are endowment plans and what should you look out for?
What are endowment plans?
Endowment plans provide policyholders with coverage for a pre-determined duration and offers a combination of protection and savings. They are versatile financial instruments designed to facilitate savings for retirement, children's education, long-term financial security, and legacy planning.
In Singapore, endowment plans often include an insurance component, and are usually referred to as endowment insurance. In an endowment insurance plan, a portion of the premium is allocated for the policyholder's life insurance coverage while the remaining portion is invested. Endowment insurance plans can exist in the form of participating endowment plans, where policyholders have a share in the insurance company's participating funds. Profits are paid out in the form of bonuses or dividends to the policy and can possibly enhance the maturity pay-out. However, these profits are not guaranteed as they are dependent on the performance of the participating fund.
Endowment plans are designed with a range of distinctive characteristics that cater to various financial preferences and goals.
- Premium payment structure
For endowment plans with a regular premium structure, policyholders will be committing to regular contributions for a pre-determined premium payment term. With single premium endowment plans, policyholders make a one-time contribution and hold the plan until maturity.
- Maturity period
An endowment plan's maturity period is defined as the length of time held before the plan matures. In the world of endowment plans, you can choose from a spectrum of maturity periods, spanning from short-term plans (2 to 5 years) to medium or long-term plans (10 to 25 years or more). In general, the longer the maturity period, the higher the potential returns.
Five things to consider when buying endowment plans
With the expansive choices of endowment plans in the market, how do we choose the right plans to fit our unique needs? Here are five factors to consider as you weigh your options.
#1 : Identify your financial goals
Are your financial goals centred around securing your child's educational future, realising the dream of owning a house, or are you strategically planning for your retirement?
Having clear goals for your future serves as a compass to choosing an appropriate endowment plan. For instance, AIA Retirement Saver (IV) can be tailored to fit your retirement needs.
Beginning from your chosen retirement age, this plan assures you a monthly retirement income, accompanied by the possibility of monthly dividends with annual increments, all within your preferred tenure of 15 or 20 years.
#2 : 100% Capital guarantee
Opting for plans which guarantee 100% capital can act as a safeguard to shield your long-term savings from potential losses. One such plan is the AIA Smart Wealth Builder (II), which offers 100% capital guarantee as early as the end of the 15th policy year for a single pay option.
It is vital to delve into the specifics of each plan and comprehend the terms and conditions associated with the potential returns. Making a discerning choice empowers you to protect your financial investments and lay the groundwork for a secure future.
#3 : The option of financial flexibility
An important thing to note for endowment plans – it is vital to hold the endowment plan until it reaches maturity. Doing so will significantly enhance your prospects of attaining yourfinancial goals. An early termination of the policy typically incurs substantial costs, and the surrender value, if any, may either be zero or less than the total premiums you have paid.
Therefore, it is essential to choose an endowment plan that you can commit to and one with a premium payment term that suits your needs. An illustrative case in point is AIA Smart Flexi Growth, which offers the flexibility to select from a variety of premium payment periods (ranging from 5, 10, or 15 to 30 years) and policy term options, allowing you to tailor the plan to your unique requirements.
#4 : Guaranteed coupons
If you are looking for plans that provides cash liquidity, you may consider endowment plans that offer guaranteed coupon pay-outs.
For instance, AIA Smart Flexi Rewards (II) disburses guaranteed yearly coupons from as early as the end of the second policy year, continuing until the year before your policy matures.
Policyholders have the flexibility to either withdraw the cash coupon, allowing you to relish life's small pleasures, or choose to accumulate them with AIA to work towards more substantial long-term savings objectives.
#5 : Non-guaranteed bonuses
If you purchase a participating endowment plan, it gives you the opportunity to partake in the performance of the participating fund through non-guaranteed bonuses.There are typically two types of bonuses:
- Reversionary bonuses:
These are bonuses that are being added regularly to the policy, typically on an annual basis. Once included in the policy, it becomes an integrated part of the guaranteed benefits of your policy. These bonuses are typically disbursed in full either upon a claim settlement or when the policy reaches its maturity date.
- Terminal bonuses:
These may be disbursed upon policy surrender, claim settlement, or policy maturity. It's important to note that terminal bonuses are distinct from reversionary bonuses.
Future bonuses, including reversionary and terminal bonuses, are not guaranteed and are adjusted depending on the experience of the participating fund, which includes the past, prevailing and projected future investment returns and other experience factors. Bonuses allocated to a participating policy are dependent upon various factors, such as the product design, the performance of the plan it belongs to, past and projected future investment returns, as well as past and projected experiences such as claims, surrenders and expenses associated with the plan.
When evaluating your choices among endowment plans, it is important to review the Product Summary thoroughly and consult with an AIA Financial Services Consultant for a comprehensive financial analysis before selecting a policy that aligns with your specific needs.
As mentioned earlier, an endowment insurance plan blends insurance coverage with investment options. However, it is important to note that endowment plans are usually designed with minimal coverage. Much as savings are important, it is also crucial to work towards getting comprehensive insurance coverage. One such plan is the AIA Guaranteed Protect Plus (IV), which offers coverage for death, total and permanent disability and critical illnesses (optional add-on). It also offers up to five times boosted coverage while accumulating stable cash value over time, giving you much needed financial security with some savings. Customers can also opt for term plans such as AIA Secure Flexi Term, which offers high coverage at affordable premiums along with a wide range of protection options to suit your needs.
To sum it up, endowment plans bridge the gap between financial security and investment growth, catering to diverse financial goals and risk appetites. As you embark on your journey to secure your future, take the time to explore the endowment plans available and carefully assess your objectives and risk tolerance. With the right endowment plans in place, you can be on track to achieving your financial goals and security.
1. Understanding endowment insurance – Money Sense
2. Participating versus non-participating policies – Money Sense
3. Your guide to participating policies 2020 – Life Insurance Association Singapore
4. Insurance Terms – Life Insurance Association Singapore
5. Frequently Asked Questions on Participating Bonuses / Dividends – AIA Singapore