Endowment Insurance Savings Plans in Singapore: Guide for 2019
Everywhere you go in Singapore, people are talking about the endowment savings plan.
And if you're here, you want to know more.
By the end of this guide, you're sure to gain a handful of knowledge on this common topic amongst Singaporeans.
What I'll be touching on are...
- Why is it so hard to save, and why you need to save and "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!
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Why Is It So Hard to Save?
We all know the importance of having money and saving it, but why is it so difficult?
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 in 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 go out to eat, 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.
If in the future, you know that saving this money will allow you to accumulate and pay for something important and crucial. 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 getting married, would you spend more or less?
Most likely the latter. It's not just the wedding dinner that you need to think about, but a whole lot of other expenses like paying for the property, renovation, kids, etc.
That means saying no to dim sum now, and go for the "cai fan", to save up money.
But there are issues with just plain o' vanilla saving.
3 Reasons Why You Need to Save AND Invest
Why is saving is just only part of the equation? There is the other half, and that is invest.
Now the "investment" I'm using just means what are you going to do with the money, not "investment-investment".
Are you going to leave money in the bank? Or are there better alternatives?
Because know this: it's good to have some in the bank, but bulk of your money should be put elsewhere.
Here are the 3 reasons why:
1) Your money will not grow with low interest rates
In a normal savings account, the interest rate is get 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 a wonderful $101,004.80.
That $1,004.80 is your return after so many years. Fair? Probably not...
But this is what most people do...
I understand the safety of leaving the money inside the bank. But pretty much nothing would happen to it - which is why something needs to be done.
2) Everything will get more expensive
The coffee you see 5 years back costs $0.50. And now, it's $1. Do you think it'll rise up again? For sure.
Because as our economy improves, costs of living will rise.
And all this is reflected in the inflation rate.
Basically it's the rate of increase for the cost of goods.
The Monetary Authority of Singapore (MAS) expects the core inflation (forecast) to come in at 1.5% to 2.5% in 2019.
So knowing that you wouldn't earn any "anything" from parking your money in the bank AND everything is getting expensive year on year.
What would happen to your money?
If the interest rate you get cannot beat the inflation rate, the value of your money will only decrease. And this reduction in value will be compounded through the years.
Although at the end of the day, you may see a nice sum in the bank, the realisation is that there's not a lot you can do with it.
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 is "offsetting" the inflation rate.
Would it mean that everything is settled then?
Think of this:
That increment you get in your pay, how do you feel about? Does it have a strong impact?
Most of us will see that increment which may be small and think what can we do with it.. and guess what we do next.
Spend it all.
And going back to square one.
This scenario applies to those who have pay increase, but those who didn't have any?
So that's why it's doubly important to put in the effort to save and make your money work harder.
Because if you're doing at least something, it's better than doing nothing at all.
How Much 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 are 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 I have at 25, 30, or 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
- Amount of current commitments
- Having to go through 2 years of National Service (NS)
- Early stage in life: pay is generally lower but 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 portion 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 have the question of "how much to save per month?" or "how much savings should I have?", as boring as it sounds, the answer is 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?
Are there things that we're wasting on our money on? Things like a subscription that you don't even use any more?
Firstly, to do a breakdown of all expenses you have. Can we take out some expenses?
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 find 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 transfer from the other "savings" account.
Some may find this hard to do, and there are external ways to do it (through a endowment plan, etc)
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 do you worse in the long run.
There is however, a sum of money that you should still put inside for emergency purposes (I'll touch on that in awhile)
As for the excess cash...
Here are some of the most common options that Singaporeans park their money in (arranged from the safest to the riskiest):
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, min. card spend, etc.
It's a good place to begin than having just a regular savings account. Be be careful though, these criteria may entice spending on your end. So you decide whether it'll be helpful to you.
And another note is: these type of offerings might not last for the long run. The banks might just discontinue it.
2) Fixed Deposits
The next step down are the "Fixed Ds".
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 D rates.
These rates can range from 1-2%.
Like the savings account with criteria, promotional fixed deposit rates may not be a long term solution.
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
Then comes the talk of the endowment plan vs the fixed deposit.
The endowment can potentially give a higher interest rate compared to the fixed deposit (depending on factors such as age, plan's tenure, etc, you could get potentially around 3%).
As with fixed Ds, you'll need a lump sum to set aside. However, you can just do a regular savings plan with the endowment.
Endowments are mostly aligned with long term goals.
As what you may need in the future can be a big amount like for retirement or child's education, such plans offer the chance of you to start saving early at a monthly or yearly amount comfortable to you.
One disadvantage is that it's not as liquid as the fixed deposit. Most plans require you to commit to a fixed duration of savings and may not offer the flexibility to withdraw.
This can be a good or bad thing, as the more you take money 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 not close to retirement age, you may want to consider having such investments in your portfolio, especially if you're young (or younger).
Such investments can give the highest potential but at same time, the possibility of losing your capital is higher too.
If you're young, you can take on that risk as there's a longer time horizon for you to earn back losses or jack up profits.
But as you get older, profits that you've gained or money that you've saved, you may want to put into safer financial instruments like retirement plans (can also be considered an endowment, just slightly different) to fortify your assets.
In a balanced portfolio, you may want to have a combination of all the above.
So what you're creating is a fortified asset that when an unexpected storm comes, it will not be able to make it crumble into pieces.
Imagine that hard-earned money that will burn up in flames... not a good sight.
What is an Endowment Plan?
"What’s the meaning of an endowment insurance savings plan?"
You'll hear Singaporeans say that sometimes.
It's quite simple...
The definition can be simplified to the following:
An endowment is an insurance policy that provides guaranteed and non-guaranteed returns upon the maturity of the plan.
In these endowment saving plans, the insurance element is close to nothing. Usually when death happens, it's usually the premiums you've paid plus any bonuses that the plan has accumulated.
People get it as a means of disciplined savings with a potentially higher interest rate.
You can either save on a monthly or yearly, or a one lump sum basis.
But if you're looking for protection needs, then getting a term separately would make the most sense.
The plan will also have a fixed maturity date, and most would get a term of more than 20 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 branch, 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 when you get it from an insurance company?
Banks cannot offer insurance products (unless they have a separate entity). So they usually need to 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 savings account. And whatever products they come up with has to have an insurance element to it.
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."
Is it the best option though? It may not be.
With a regular plan coupled with a fixed deposit, you may get more at the end of the day.
With a method called "drip-feeding", you essentially get a regular savings plan, then with the excess cash, you can leave it in the fixed deposit.
And with every year, you can just contribute to the plan with the funds from your fixed deposit. That way, you're able to get higher interest from the fixed deposit as well as the endowment, while still retaining some liquidity in the earlier years.
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 females and males 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 for application fees, books and all.
Subsequently, payouts after starting school can be paid for the future semester fees.
I see this as part of marketing...
And you probably could do without an education plan and just go for the regular ones.
Similar to the education plan, retirement plans are endowments too but have their own unique features, which will make a lot more sense.
You'll probably don't need the lump sum upon maturity and end up leaving the money in the bank account which then gives you "0 point nothing" interest.
Inflation eventually eats it up again and thus going full circle back to the underlying problem.
In a retirement plan, there can be monthly or yearly income payouts for a specified period of time upon maturity.
The bulk of your money is still inside growing at a highest interest. And even after your selected retirement age, if you don't wish to continue receiving the regular payouts, you can choose to just surrender and receive the whole lump sum (depends on the plan).
If you wish to know more, see here for a whole guide on retirement plans in Singapore.
Most plans are pretty rigid in that you need to contribute the premiums without much flexility. If you stop early, or discontinue, then the plan may 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're likely to be able to take out the accumulated cashback amount.
Students and those that don't have a future financial goal in mind would usually go for a cashback endowment as some needs may unexpectedly arise in the near future.
With that being said, when there's more flexility/liquidity is in the plan, the returns compared to the endowment without the cashback option is lesser. So if you don't wish to take out any money at all, go for the non-cashback option (which is the regular).
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.
What it means is in the contract, when it comes to maturity, the guaranteed portion you'll receive back is lesser than the premiums you've paid over the years. However, as the total payout upon maturity includes the non-guaranteed bonuses as well, you usually get more than you've paid.
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...
These conditions can be that you'll need to pay the full premiums and hold the plan till maturity.
I guess that's the least insurance companies can ask when they take away the risk of volatility from you.
If we contrast it with Bitcoin...
At its all time high at $26,517 SGD on 16 Dec 2017, it has dropped 80.6% to it's current price (6 Jan 2019) at $5,144.04 SGD.
If you've invested at the high with $100,000, you would be left with a value of $19,400.
And this is the mother of all Bitcoins (plus alt coins) and deemed one of the most stable coins. This is the cost of investment. It has potentially the highest gains, and the reverse can be true.
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.
The thing is...
With a guaranteed yield, you'll stay retain opportunity cost.
Let me explain...
If you wish to partake in investing on your own, say in bitcoins, you'll be diverting your money away from safety of fixed deposits, losing out on that 1%. It may not be much but it's still an opportunity cost.
With a guaranteed yield, you'll still retain this opportunity cost, while still have the potential of upsides in the form of non-guaranteed bonuses.
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 and within that period, you're able to find another job.
The rest could be put into other areas but it still depends on your risk profile and appetite.
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 a 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 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
Sometimes, life is unpredictable.
There are times when we need money urgently. And that's why you should always have an emergency fund of 3-6 months.
Outside that, there may not be a lot we can control.
Most endowments do not have a liquidity option (where you can take out money). It's a good thing really, you don't want to draw out knowing your future will be impacted.
A specific group of endowments do have that liquidity... and that's cashback.
Cashback allows you to draw out some amount as per what's dictated in the policy.
If you're not comfortable setting aside a regular amount every year for the long term, and that nagging feeling of needing some money along the way pokes you relentlessly, then you may consider these cashback options. But do note that the returns you get are likely to be lower than endowments with no liquidity option.
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 even the minor ones, 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 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 form of resource on your end.
You'll need to dedicate time, forgoing personal and family time to monitor investments...
You'll also need to risk money that can be used more efficiently ...
With no guarantees that it'll all work out.
So, you may as well put your excess cash into something that can provide decent returns while retaining capital.
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?
What I'm trying to bring across is this:
Making more gold out of gold is important.
There's a time for making potential mountains of gold out of gold.
And there's also a time for making decent gold out of gold.
The crucial factor is... you. You creating that gold first.
When you dedicate your time on your career, and let an endowment take care of the "make your money work harder" part, it can be healthy loop.
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 the guaranteed part still stays).
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.
And that's why, having a policy which is not just capital-guaranteed but have a high guaranteed yield is important.
3) Longer commitment period
In return for taking away the risk of investments and 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'll 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.
What's the Best Endowment Plan in Singapore
Are endowment plans worth it?
Hopefully by now, you managed to increase your brain size on this topic.
It's easy to select an endowment plan.
What you'll need to know are the requirements you have like:
- How long do you want to save
- When do you need the money
- Returns of the plan
And the only way to find all these is through to do a comparison.
Compare and get the best endowment savings plan in Singapore now.