5 Unconventional Uses Of An Endowment Plan
An endowment plan is a life insurance policy that offers a maturity benefit at the end of its term. You also receive insurance coverage in the event of an unfortunate event like death or permanent disability.
However, the primary purpose of an endowment plan is usually not to provide insurance coverage. Buying an adequate amount of life insurance using an endowment plan could be prohibitively expensive.
According to Foo Xiang Ying, Assistant Vice President at Chamberwealth Financial, “The concept of an endowment plan is not new, where your savings are accumulated over time till a specific end date.”
Many individuals opt for endowment plans as it is a form of “forced savings.” Insurance premiums need to be paid on a monthly, quarterly, or yearly basis. This compulsory payment instils a sense of discipline in the policyholder.
Traditionally, these plans are seen as a good way to accumulate a lump sum at a certain future date. You could buy an endowment plan that has a maturity date that is less than ten years away, although many policies mature 15, 20, or even 30 years after they start.
The idea is to time the maturity to coincide with the requirement for a large amount of money. Usually, policyholders use the funds that they receive to meet their expenses in their retirement years. Another common application of the maturity amount is to help pay for a child’s university education.
But endowment plans can be used for non-traditional purposes as well. Here are five unconventional ways in which policyholders can benefit:
Some endowment plans do not require medical underwriting
“For people with medical issues and unable to get medical/life plan to protect their assets, they tend to rely heavily on endowment plan to quickly build up cash to prepare themselves during a medical emergency. In this scenario, they look for a guaranteed issuance endowment plan (no medical underwriting) that provides high returns and liquidity,” Mon Chao, founder of Mon Chao Assurance, explains.
Yes, you can actually buy a life insurance policy that does not involve a medical examination. In most instances, this is merely a convenience. You don’t need to go through the hassle of undergoing a visit to the doctor.
But it can be a great advantage for individuals who have a medical condition. In such a situation, insurers usually refuse to provide coverage that has a death benefit. These individuals can opt for an endowment plan that does not require a medical examination.
You don’t need to provide exhaustive details about your medical history and nor do you need to go through a medical examination. Of course, the death benefit that is available under an endowment plan is relatively small. However, it could prove to be a significant advantage for someone with a medical condition.
Your premiums could be waived in the event of a critical illness
Critical illness coverage is usually fairly expensive. But you can reduce this cost by buying a critical illness rider when you purchase your endowment plan.
In the event of the occurrence of a critical illness, the policyholder’s remaining premiums will be waived. Foo Xiang Ying points out that this feature provides an additional advantage as well.
If one of the purposes of purchasing insurance is to provide for a child’s education expenses in the event of the critical illness of a parent, an endowment plan can be a good solution. The critical illness rider is usually available at a low cost, allowing the policyholder to save on insurance premium.
Denominate your endowment plan in US$
Remember that your endowment plan is primarily a form of investment. By setting aside a sum every month or every year in the form of your insurance premium payment, you will be entitled to a lump sum upon the maturity of the plan.
A good investment portfolio relies on diversification to provide steady and stable returns. It is not advisable to be over-reliant on a single asset class or to denominate all your investments in a single currency.
By investing in an endowment plan, Singaporeans have the opportunity to diversify into a US dollar-denominated investment. This can be especially useful if plan to buy property in America at a later date.
An endowment plan that pays a maturity amount in US dollars can also provide an advantage if you plan to use the maturity amount to pay for your child’s college education in America.
Your endowment plan can work like a retirement plan
Retirement plans provide retirees with a steady stream of income in their retirement years. Your endowment plan can serve a similar purpose.
Foo Xiang Ying explains, “Endowment plans can imitate the role of our retirement plans by introducing a fixed, disciplined way to save towards our retirement and offer regular monthly payouts.”
The income from your endowment plan can even complement the money that you receive from other retirement plans that you already have. The enhanced amount at your disposal can help you to meet unexpected expenses and provide the means to a more comfortable retired life.
An endowment plan can work like a trust fund for your children
Every parent is deeply concerned about the welfare of his or her children. But what if you meet with an unfortunate incident when your children are young? How will you ensure that they have the money that they require for their day-to-day needs and to complete their education?
One option is to establish a trust. The trustees will follow your instructions and you can be sure that your children will have access to the funds that you have set aside for them.
But there are two problems with this approach. Firstly, the minimum amount that you need to set up a trust is quite high. It could be in the region of about a million dollars. Establishing and maintaining a trust can also be expensive.
An endowment plan offers a solution. It functions like an improvised trust fund and you can purchase a plan that meets your specific needs.
Other rare unconventional uses
Mon Chao notes that many individuals sign up for endowment plans in order to leverage on credit card cash backs. “When done properly, it is possible to earn interest on three different financial instruments on the same dollar saved,” he explains.
Endowment plans on its own can be taken up to help maximise ones profits. Mon Chao recalls, “Many of my clients channel the dividend from their income fund into an endowment plan to grow it steadily over the years.”
Tailor your endowment plan to suit your requirements
There are a wide variety of endowment plans that are available in the market. You can choose the length of time for which you will need to pay insurance premiums. It is also possible to select the timeframe within which you want to receive your payouts.
Mon Chao believes that there is no hard and fast rule of identifying an endowment plan that maximises the returns due to the vast variety of endowment plans available in the market. That being said, there are a few areas that he advises one should look into. “A few important factors to take note of when shopping for an endowment plan includes saving time horizon, effective yield, liquidity and participating fund performance. In terms of returns, all figures depicted on benefit illustrations are projected and hence, should not be used for comparison purposes. A financially savvy individual will focus more on the past performance of the participating fund, whether the insurer has cut bonuses during financial crisis and whatnot.”
Don’t be in a hurry to make a choice. There are about 30 life insurance companies in Singapore and between them, they offer dozens of different endowment plans. It shouldn’t be too difficult to find a plan that is right for you.
ZUU Investment Disclaimer: The information given above is based on our experts’ field of expertise and their own personal experience, and should not be relied on or construed as financial advice. ZUU online recommends that our readers take these pieces of advice as a starting point, to research and then assess the merits of this advice based on their own financial needs, investment goals, and risk tolerance.