To better understand how Endowment policies and Saving plans work, refer to our earlier article: Saving plans and Endowment policies: How does it work?
Endowment and Savings Policy: The Disadvantages
A habit of saving regularly is certainly encouraged and a part of good financial planning process. What can go wrong with a financial instrument that gives you potentially higher returns for saving regularly?
Read about: No budget for financial planning?
We break down the commonly overlooked factors:
Penalties upon early termination
Like all traditional life insurances, early termination of the policy will lead to monetary loss. Surrendering your policy before 24 months is up, will result in getting less than 10% of your total premium paid. In fact, surrendering an Endowment and Saving Policy before its maturity will almost certainly lead to a loss. A maturity bonus component payable at the end of the policy plays
A maturity bonus component payable at the end of the policy plays a large part towards the final maturity value seen on the Benefit Illustration of the policy.
Lower investment returns/ Inflation risk
Traditionally, endowment plans are a risk-free product that offers principle guaranteed upon maturity. The safely, however, are compensated by lower potential returns. Your returns may or may not be able to keep up with inflation, but it will never outperform unlike Investment-linked policies or unit trusts.
An Investment Linked Policy which offers Health and protection coverage and investment elements can be considered. Alternatively, if insurance coverage is not required, look at generating a higher financial return by managing an Investment Portfolio.
Read about: Investing Basics: Types of Investments
Read about: 3 Best Investment Linked Policies in Singapore for Wealth Accumulation (2023 Edition)
Lower insurance coverage
As endowment and saving policy are generally guaranteed issuance with no medical questions asked upon application, they provide little or no insurance coverage. Most of the companies provide either a 101% or 105% of total premiums paid upon death. They also do not lifetime coverage for Total Permanent Disability, Critical Illness, and Early Critical Illness.
While riders can be added for additional health and protection coverage, any offered coverage stop when the policy matures. A Whole Life policy or Term Life insurance policy may offer higher coverage for life or over a longer period of time.
Read about: Term Life or Whole Life – Which is more suitable for you? (Detailed comparison)
Read about: How much life insurance coverages do you need? (Detailed Analysis)
Who are Endowment and Savings Policy suitable for?
An endowment savings plan is suitable for risk adverse profile as they are often principal guaranteed. It is also beneficial for people who cannot save regularly. You may consider an endowment policy if you are looking to save for a particular goal over a long-term, minimally ten years.
A person who has been saving regularly into their bank account every month from their salary should also consider to partition their savings into two parts, leave a part in the savings account for emergency use, and another part in an endowment to generate a higher return as compared to a savings account.
Read about: 3 Best Endowment Savings Plans in Singapore for Lifetime Wealth Accumulation (2023 Edition)
Read about: 3 Best Endowment Savings Plans with Fixed Maturity in Singapore for Wealth Accumulation (2023 Edition)
Consider other alternatives such as a retirement plan
if the purpose of your savings is towards longer-term goals such as retirement, consider a retirement annuity plan which may generate a higher rate of financial gains over time. Compounded returns tend to work better in your favour which given a longer time horizon towards maturity.
Read about: 3 Best Retirement Annuity Plans in Singapore for High Income Payout (2023 Edition)
Read about: 3 best Retirement Annuity Plans in Singapore with Increasing Income Payout (2023 Edition)
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