One common insurance plan that Singaporeans have is the endowment savings plan.
If you’re here, I’m sure you want to know more about it.
By the end of this article, you’re sure to gain some knowledge, and decide whether an endowment is suitable to you or not.
What I’ll be touching on:
- Why is it so hard to save, and why you need to save/invest
- The different alternatives to park your money in
- What are endowments and how do they work
- The pros and cons of a savings plan
…and much more
So, read on!
- Why Is It So Hard to Save?
- 3 Reasons Why You Need to Save and Invest
- How Much Do Singaporeans Save Per Month?
- How Much Savings Should Have at 25, 30, and 40?
- Part 1/2: How To Save Money?
- Part 2/2: Investment Options in Singapore
- What Is an Endowment Plan?
- How Do Endowment Plans Work?
- The Difference in Getting an Endowment From the Bank and From an Insurance Company
- The 5 Different Types of Endowment Saving Plans
- The Pros and Cons of an Endowment Savings Plan
- What’s the Best Endowment Plan in Singapore?
Why Is It So Hard to Save?
We all know the importance of having money and saving it, but why is it so difficult sometimes?
No matter how hard we try, we always succumb to the temptation of spending and not saving enough, or worse, not at all.
Do you find yourself in such a situation?
We’ve all been there.
Why does that happen? I would like to go deeper and bring you a concept which you may have heard before:
Instant Gratification vs Delayed Gratification.
As humans, we tend to steer towards things that we enjoy in the moment.
When we shop, it brings up many positive emotions, especially when you see something you like, and absolutely must have.
On the same note, when we dine out, we tend to order the “tastier” and uncommon food. Think “cai fan” vs dim sum. We’ll want that dim sum option (or whichever happy food you like) more than the common one, usually. But it comes at higher cost.
That’s when Delayed Gratification is needed.
You know that saving this money will allow you to accumulate and pay for something important and crucial in the future. And you will find all means to make that happen. Even if it means “suffering” for now.
You’ll move mountains to get what you want.
For example, if you know you’re going to get married soon, would you reduce your current spending or increase it?
Most likely you’d reduce your expenses, so that you can have more for the wedding and other expenses like paying for a property, renovation, kids, etc.
That would mean saying no to dim sum now, and go for the “cai fan”, so as to save more money.
But there are issues with plainly saving money.
SIDE NOTE When was the last time you've done proper financial planning or went through a review of your finances? In this day and age in Singapore, doing so will absolutely improve the quality of life for you and your loved ones. Here are 5 reasons why financial planning is so important.
3 Reasons Why You Need to Save and Invest
Saving is solving half of the problem. The other half is that it should be invested (depending on your risk appetite).
For the money you’ve saved, where are you going to place it? In the bank? Or are there better alternatives?
Because know this: it’s good to have some in the bank for emergency funds and/or short term financial goals, but in my opinion, bulk of your money should be placed elsewhere.
(The only exception is that you have too much money, but you don’t need to take unnecessary risks.)
Here are the 3 reasons why:
1) Your money will not grow with low interest rates
In a typical savings account, the interest rate is usually at 0.05% per year.
Which in my opinion is “zero point nothing.”
See, if you’ve saved $100,000 and left it in the bank. After 20 years, you’ll get back $101,004.80.
The returns of $1,004.80 aren’t attractive, especially after 20 years.
But this is what some people are doing.
I understand it’s comfortable to leave money in the bank because it’s safe and secure.
But because pretty much nothing would happen to it is the reason why something needs to be done.
2) Everything will get more expensive
The coffee you bought 10 years back costs $0.50. And now, it’s $1. Do you think it’ll rise again? For sure.
When our economy improves, the costs of living will inevitably rise because of higher goods and services consumed.
And this can be seen in the inflation rate, which is the rate of increase in the price of a basket of goods and services.
The Monetary Authority of Singapore (MAS) expects the core inflation (forecast) to come in at 1.5% to 2.5% in 2019.
What’s going to happen when you don’t earn “anything” from parking your money in the bank, while everything is getting expensive every year?
If the interest you get can’t beat the inflation rate, the value of your money will only decrease over time.
At the end of the day, you may see a nice sum in the bank because of your hard work and discipline, but it could’ve been worth more.
3) Your salary may not rise with inflation
Business Times reported that pay will rise by an average of 4% in 2019.
This is a good thing because your pay can “offset” the inflation rate.
But some may have a different mindset about it.
The increment may be deemed small and lacked any impact, and so the next thing is to spend it all, going back to square one.
And what about those who don’t have much of a pay rise?
This is why it’s important to put in the effort to save and make your money work harder.
How Much Do Singaporeans Save Per Month?
Saving is important … checked.
Investing is important … checked.
But how do Singaporeans fare in the area of saving?
A study on middle to high income earners had been conducted in Singapore.
The findings were that 97% of Singaporeans who are above the age of 25 saved part of their income.
And, a majority of them are saving between 30% to 49% of their salary.
So for example, if one is earning $10,000/month, $3,000 to $4,900 is being saved.
Do you form part of that statistic?
And what are they saving for?
- Retirement: 14%
- Emergencies: 14%
- Big purchases: 13%
- Children’s education: 9%
- Pay off debt: 9%
- Miscellaneous: 5%
- For no actual purpose: 36%
How Much Savings Should Have at 25, 30, and 40?
No one person is the same.
There are a variety of factors that affect how much savings you should have at a certain point in life.
These factors are:
- Being a graduate or not
- Current commitments
- Having to go through 2 years of National Service (NS)
- Early stage in life – pay is generally lower, and higher commitments like student loans, marriage, housing loan, kid’s education
- Later stage in life – pay is generally higher, and lesser commitments having paid up most of the loans
Seedly has done an excellent write up on this, and you can see savings rate for both male and female below:
For the Male Fresh Graduate:
For the Female Fresh Graduate:
So if you’re thinking how much you should have, the answer is, as boring as it sounds, it depends.
Part 1/2: How To Save Money?
If you want to take the first step to get your finances sorted out, knowing a good way to do this helps you get your mind straightened out and become more committed.
This is how most people spend and save their money…
During the month, we spend whatever we want to spend on: daily expenses, food, transport, loans, etc.
At the end of the month, we then save whatever we have left (if any).
Is this the most optimal way? Likely not.
So how do we improve on this?
Firstly, to do a breakdown of all expenses you have.
Are there things that we’re wasting on our money on? Things like a subscription that you don’t even use any more?
Optimising your expenses is a sure win to increase your savings.
In fact, from a survey we did, 71.9% of respondents who track their monthly savings say that don’t overspend.
And then the better way to save is… to do the reverse.
First, set a monthly goal of how much you want to save for yourself.
Secondly, when your pay comes in, transfer this savings out to another bank account that you don’t utilise at all. You should make it difficult to withdraw money out of this account (no card or cheques to use).
Lastly, once that’s done, know that the original account is your “spending account”. Be aware of how much you have in this account. Once it goes low, it’s time to cut down on expenses.
The objective is to not allow yourself to use the other “savings” account.
If you wish to know more, learn about how to budget money effectively.
Some may find this hard to do, and there are external ways to help you save (e.g endowment plan)
Part 2/2: Investment Options in Singapore
So you’ve started to save. That’s great. The next thing to do is what are you going to do with the excess cash?
From the above, leaving all your money in the bank may not be help you in the long run.
For the excess cash outside of emergency funds and short term goals, here are some common options to park your money in:
1) Savings Account
The good ol’ savings account is every Singaporeans’ favourite option.
The savings account that most have only offers an interest rate of 0.05%/year.
It is also the most liquid-able option. You can withdraw money as and when you like.
By far, it’s the most safest form of parking your money.
(Probably beats leaving money inside your pillow because homes can catch fire too)
In recent years, a different variation of savings account is what banks are offering now.
These saving accounts have a criteria to fulfil before being able to provide you with higher interests.
These criteria can be having it as your salary crediting account, having your bills on giro, minimum card spend, etc.
It’s a good place to begin compared to having just a regular savings account. Be be careful though, these criteria may entice spending. So you decide whether it’ll be helpful to you.
And another note: these type of offerings might not last for the long run. The banks might just discontinue it or lower the rates.
2) Fixed Deposits
Next is the fixed deposit.
While not as liquid as the savings account, the fixed deposit offers a higher interest rate.
DBS offers a 0.95%/year interest for their 12 months fixed deposits.
But from time to time, there are promotional fixed deposit rates.
These rates can range from 1-2%.
Promotional fixed deposit rates may not be a long term solution, and they’re usually for a few years only.
Banks may try to attract people to park money with them by coming up with these promotions because they’re able to capitalise on the influx of money. But, they can change the rates anytime.
3) Endowments/Saving Plans
The endowment can potentially give a higher interest rate compared to the fixed deposit, depending on various factors such as age, plan’s tenure, etc.
With fixed deposits, you’ll need a lump sum to set aside. However, for endowments, you can simply contribute regularly.
Endowments are mostly aligned with long term goals.
As what you may need in the future can be a big amount, like saving for retirement or a child’s education, such plans enables you to start saving early at a comfortable amount.
One disadvantage is that it’s not as liquid as the fixed deposit. Most plans require you to commit to a fixed duration and may not offer the flexibility to withdraw.
This can be a good or bad thing, as the more you withdraw cash out and spend, the more your financial goals become less achievable.
Investments here would mean the whole wide range available.
It can be bitcoins, property, stocks/shares, ETFs, unit trusts, etc.
The common trait they have is that the value fluctuates.
The riskier the investment, the higher the volatility (fluctuates greater).
If you’re younger, you can consider having such investments in your portfolio.
Such investments can give the highest potential, but at same time, the possibility of losing your capital is higher too.
Therefore, if you’re young, you can take on that risk as there’s a longer time horizon for recovery.
But as you get older, the profits or money you’ve save might need to be placed into safer financial instruments to fortify your assets.
In a balanced portfolio, you may want to have a combination of the above.
So whenever an unexpected storm comes, it won’t crumble your assets.
What Is an Endowment Plan?
An endowment is an insurance policy that provides guaranteed and non-guaranteed returns.
In these endowment saving plans, the insurance element is usually insignificant, as most of your premiums go to savings.
People usually get it as a means of disciplined savings, monthly or yearly, with a potentially higher interest rate.
But if you’re looking at protection needs, then getting a separate term insurance would make the most sense.
The plan will also has a fixed maturity date, which is usually 20 or more years.
How Do Endowment Plans Work?
Basically, the premiums you contribute are pooled together along with other policyholders’ monies. This pooled monies is called a participating fund.
The insurance company then use the fund to reinvest.
They could reinvest in the following:
- Deposits and Money Market Securities
A majority of the funds usually go into bonds as it’s relatively safer in the long run.
In return, the insurance company provides guarantees as well as non-guaranteed bonuses to you.
Most endowment plans nowadays are capital guaranteed (subject to conditions met) and that’ll mean that the insurance company absorbs the risks of investment while still providing you with upsides.
Here’s Aviva’s CEO explaining how participating funds work:
The Difference in Getting an Endowment From the Bank and From an Insurance Company
When you go to a bank, you may be presented with options to make your money work harder.
These could be unit trusts, structured products and endowments.
Is the endowment the same as the one you can get from an insurance company?
Banks cannot offer insurance products (unless they have a separate entity). So they usually tie up with insurance companies.
For example, UOB works with Prudential and DBS works with Manulife.
Likewise, insurance companies cannot offer bank-like products like a savings account. And whatever products they come up with need to have an insurance element.
In my opinion, there are advantages to get a plan from an insurance company, especially from a representative that can distribute multiple companies, and not just one.
Here are some of them:
- Turnover in the bank can be high, so if your banker leaves, the policy would be transferred to another banker whom you might not know
- An insurance agent may have more at stake as his career is very dependent on his advice and service in the long run
- An agent that’s able to distribute multiple companies is able to provide comparisons, and not just tied to 1 company.
The 5 Different Types of Endowment Saving Plans
1) Single Premium
The single premium endowment is what its name suggest:
Just a one-time lump sum upfront.
One advantage is that it’s lesser of a hassle. Just “plug and play.”
But not all insurance companies have single premium saving plans.
2) Regular Premium
The other partner to the single premium, regular premium endowments.
With a regular savings plan, your upfront outlay is much lesser than the single premium (obviously), and you’re able to contribute monthly, making it easier to save. With a regular premium, you have a longer horizon to save up for bigger ticket items.
And because of those few reasons, regular premium endowments are the most common in the market.
These regular premiums are also flexible and could also be limited pay or pay till the end of the policy term. So it really depends on your needs.
3) Education Plans
Although “education plans” are essentially endowments too, they do have unique features that cater specifically to pay off tertiary tuition fees.
How it works:
The plan usually caters to the different age of females and males when they enter university.
In a normal regular endowment, there’s usually only 1 payout, and that’s upon maturity.
In an education plan, there can be multiple smaller payouts before and after entering university.
For example, there can be a payout 1 year before entering university for application fees, books and all. Subsequently, payouts after starting school can be paid for the future semester fees.
Regular ones are more simple, though.
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Similar to the education plan, retirement plans are endowments as well, but have their own unique features, which will make a lot more sense, if you’re saving for retirement.
You may not need the lump sum upon maturity from normal savings plan, and so the retirement plan provides a monthly or yearly income for a specified period of time.
The bulk of your money is still growing inside. Even after your selected retirement age, if you don’t wish to continue receiving the regular payouts, you can choose to surrender (depends on the plan).
If you wish to know more, check out a complete guide on retirement plans in Singapore.
Most plans are pretty rigid in that you need to contribute the premiums without much flexility. If you’re unable to pay the premiums, the plan will lapse.
With a cashback plan, there’s an increase in liquidity.
For example, after the 3rd year, there can be yearly cashback that can be paid out to you. If you don’t need that money, you can “reinvest” back into the plan. The default option that most go for would be to “reinvest”.
If they need to use some money in the future, they can tap on this accumulated cash back amount.
With that being said, as there’s a higher degree of liquidity, the returns from a cashback plan is generally lower than one that doesnt offer any cashbacks.
The Pros and Cons of an Endowment Savings Plan
Now you have a pretty good idea what an endowment is and how it works…
Is it worth it?
The following section explains why Singaporeans get endowments (or not).
Here are the benefits and features of such plans as well as potential downsides to note…
1) Safe-keep your money with capital guarantees
A few years back, most endowments may not be capital-guaranteed.
It meant that when it reaches maturity, the guaranteed portion you receive is lesser than the premiums you’ve paid. However, as the total payout includes the non-guaranteed bonuses as well, you’d usually get more than what you’ve put in.
Times have changed.
Endowment plans you see now are mostly capital-guaranteed. You’ll still need to see the contract (policy illustration).
But there are conditions to be met, such as paying full premiums and holding the plan till maturity.
I guess that’s the least insurance companies can ask when they take away the risk of volatility from you.
By having a capital guarantee, it protects you from adverse market conditions. And that’s why endowments don’t just cater to the conservative, but to the investment-savvy people who see it as a diversification in their overall portfolio.
2) Guaranteed yields to match with the competition
When you have a guaranteed yield on your endowment, it would mean that the plan is “more than capital guaranteed”. Of course, it still depends on the plan. Some plans could offer high guarantees but lower overall returns.
3) Enjoy potential upsides with bonuses
In a participating endowment plan, you’ll receive a bonus statement every year. The statement tells you how was the year’s performance, and how much bonuses are declared.
If you still don’t know how it works, scroll up and watch the video on how these bonuses work.
These bonuses are an add-on to the capital-guarantees or guaranteed yields.
Without getting too technical, sure, the returns you see in the policy illustration are illustrated and based on the participating’s fund performance.
But if you know how they work, they’re generally quite stable and insurance companies dislike cutting bonuses as it’ll hurt their reputations.
There’s also no work to be done from you. You don’t need to time the market and can essentially let someone else do it for you.
4) Forms a foundation in a well-balanced and diversified portfolio
Be it the savings account, fixed deposits, endowments, investments, these all have their own place.
Depending on risk appetite and where you are in life, each allocation may be different.
There’s a general rule of thumb though.
It’s good to hold 3-6 months of income in liquid assets like the savings account. This is to counter unexpected retrenchment, so you’re able to find another job within that period.
The rest could be put into other areas, depending on your risk profile.
If you know that in 20 years time, you’ll need money for an important purpose, retirement or kid’s education, and when that time comes and bulk of your money are in investments which have got down by 50%, what are you going to do?
Would you sell it? Most probably not, because it’ll be a guaranteed loss. So you’ll hold on to it, but you still need money to come in from somewhere.
That’s when these endowments come in handy as no matter rain or shine, you know the money is still there.
5) Choice of additional covers to be more comprehensive
At its core, an savings plan is still an insurance policy.
It provides some sort of protection.
The basic plan usually only provides a death benefit.
However, depending on your needs, you can choose to add in Total & Permanently Disability cover, etc.
You could also add in Critical Illness (CI) cover but they usually are just premium waivers. Meaning, if a CI were to happen, you don’t need to pay the premiums for the plan anymore.
With all that being said, most Singaporeans would just get the pure basic plan. And for the “what if” scenarios, a term plan will take care of undesirables like CI and early CI.
By having a term with an endowment, you’re able to separate protection and wealth accumulation needs.
6) Options for liquidity if needed
Life can be unpredictable.
There are times when we need money urgently. And that’s why you should always have an emergency fund.
Most endowments aren’t liquid, but that’s good, as drawing money out will impact the future savings you have.
But because certain things aren’t in our control, having the liquidity from a cashback endowment can help.
7) Guaranteed issuance of policy even with minor (or major) health conditions
It is difficult for one to get insurance when you have medical conditions, and you may need to jump through hoops, and even then, acceptance is not guaranteed.
If your condition is deemed serious, outright rejection may be in the books.
What options do you have left then?
As a basic endowment focuses more on accumulation of wealth and not protection needs, the “insurance element” is negligible. And so you’re not paying for “protection” and that’s why it’s usually a guaranteed acceptance. Unless you add on riders like a critical illness premium waiver, then you’ll still be subjected to health underwriting.
Now this doesn’t matter if you’re healthy but if you’re not, you can see an endowment as a “self-insurance”.
What do I mean?
If you’re not able to get any form of insurance, you’ll need to set aside money for the worst case scenario. Either for hospital bills, and to set aside for the family if anything happens.
By using a disciplined form of savings (through an endowment), you’re able to accumulate and use the money if anything happens. If nothing happens, then good. You can just use it for your own retirement … or pass it to your loved ones.
8) Gives you time to do what you do best to earn money
Most people see investments as a means of escape. And it can be… just that you take on the risk.
Most types of investments will require some resource on your end.
You’ll need to dedicate time, monitor investments, etc.
With no guarantees that it’ll all work out.
So, you may as well put your excess cash into something more passive, and focus on what you do best.
If you’re a business owner, your money is best spent reinvested into your business (unless you’re happy and want to fortify your assets).
If you’re salaried, the best way to earn more money is through investing in yourself to make your career soar to new heights. If you don’t like what you’re doing now, switch careers or start some side hustle. Who knows, you may just quit your job and do that full time?
9) The disciplined approach forces you to stick to the correct habits
Earlier on, I mentioned about Instant Gratification vs Delayed Gratification.
Knowing that in the future, you’ll need a sum of money, you should dedicate some money right now for that purpose. You’ll experience a slight discomfort at the start because it may not be something that you’ve been doing. But eventually, it becomes natural.
Our our minds have been programmed to enjoy “in the moment” and thus it may be hard to do. Even if you manage to do save properly, there may be a chance that you’ll revert back.
With an endowment, you take on a more disciplined route. Instead of you “disciplining” yourself, which takes a lot of mental effort on your end, you can let an external party “discipline” you instead.
1) Not having the highest of returns
We’re all driven to get the highest returns with the lowest risk.
Who would want to go into a high risk, low return kind of agreement?
Straight up, endowments do not give the best of returns.
But it can form part of a balanced portfolio that complements other types of “investments” including cash, fixed deposits, and investments.
It forms to middle ground that gives decent returns while still being a safe asset.
Together with the guaranteed and non-guaranteed, endowments can be a good alternative to beat inflation.
2) Illustrated returns may not be actual returns
The non-guaranteed portion in an endowment is what it says. Non-guaranteed.
The insurance company may choose to cut bonuses if needed when market conditions is extremely bad.
But they do have a certain amount of bonus that they strive to give year on year.
Basically, even if the participating fund earns 20% that year, that won’t translate to actual returns (or bonus) to the policyholder. Why so? Because in bad years, these “excess returns” can then be used to pay out the “illustrated” bonuses.
Again, this is easier explained in the video if you scroll up.
3) Longer commitment period
In return for taking away the risk of volatility, the insurance company requires you to commit.
The investments that they make could be for the long term as well. And if many users don’t stick to the commitment, it’ could result in lower fund performance – detrimental to all.
These plans are usually for the long term.
If you terminate early or before the maturity, the payout you receive may be less than the premiums you’ve made.
So before making this commitment, ensure that you’re able to pay the full premiums and for the specified premium paying term.
Start with something more comfortable first, then increase your commitments down the road.
- Safe-keep your money with capital guarantees
- Guaranteed yields to match with the competition
- Enjoy potential upsides with bonuses
- Forms a foundation in a well-balanced and diversified portfolio
- Choice of additional covers to be more comprehensive
- Options for liquidity if needed
- Guaranteed issuance of policy even with minor (or major) health conditions
- Gives you time to do what you do best to earn money
- The disciplined approach forces you to stick to the correct habits
- Not having the highest of returns
- Illustrated returns may not be actual returns
- Longer commitment period
What’s the Best Endowment Plan in Singapore?
Are endowment plans worth it?
Hopefully by now, you can see some benefits to having one.
The only way to find the best endowment plan suited for you is through a comparison.
Compare and get the best endowment savings plan in Singapore now.