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5 Things you need to know before buying an Endowment Policy in Singapore

Looking to buy one? Read this first:

A) Participating Policy Vs Non-Participating Policy

B) Single Premium Policy Vs Regular Premium Policy

C) Policy Term: Limited Vs LifeTime

A) Non- participating Endowment Plan with Guaranteed Return 

B) Participating Endowment Plan with Guaranteed + Non-Guaranteed Return

1) What is an Endowment Policy?

An endowment policy is a type of life insurance policy that comes with all 3 elements of protection, savings and investment.

It’s designed to pay a lump sum either on its maturity / a pre-specified interval or on death / total permanent disability.

A part of the premiums you pay goes towards insurance coverage, while the rest is invested and may subject to risk.

The element of insurance is especially useful in the event that a person passes on while he is investing for the future of someone important to him.

2) What are the different types of endowment policy?

a) Participating Policy Vs Non-Participating Policy
Participating Endowment Policy:
  • It comprises guaranteed and non-guaranteed benefits.
  • This type of endowment policy participates in the performance of the Insurer’s Participating Fund.
  • Part of the premiums is pooled together and invested with premiums from other policyholders in the Insurer’s Participating Fund.
  • The performance of the Participating Fund affects the policy’s bonuses which is the non-guaranteed benefits return.
Non- Participating Endowment Policy:
  • It comprises guaranteed benefits only.
  • This type of endowment policy does not participate in the performance of the Insurer’s Participating Fund.

B) Single Premium Policy Vs Regular Premium Policy

Single Premium: Full premium is paid in one lump sum before the commencement of the policy

Regular Premium: Premium is paid regularly in fixed instalments, on monthly, quarterly, semi-annually or annually.


C) Policy Term: Limited Vs LifeTime

Limited: Policy term is for a fixed period of time and policy ends after the term.

Lifetime: Endowment policy with lifetime payout is also known as annuity policy, policy term is as long as the life assured is alive.

There are many variants of endowment policy in Singapore market with different combination of the above, eg. Participating single premium policy with lifetime cash benefit, Participating single premium policy with 20-year cash payout at age60, Participating regular premium accumulation/builder policy, Non-participating single premium policy with guaranteed return, so on and so forth.

3) How to evaluate an endowment policy return?

A) Non- participating Endowment Plan with Guaranteed Return 

This type of endowment plan does not participate in the performance of the Insurer’s Participating Fund.

As these plans have almost no ‘investment risk’, the return is therefore capped at the guaranteed rate.

It’s usually Capital Guaranteed upon maturity, and the Surrender Value is usually lower than the premium paid before maturity.

You can compare guaranteed Yield at maturity with the returns of Singapore Savings Bonds and Singapore Government Securities. You may refer to https://www.mas.gov.sg/bonds-and-bills for more information on the returns of Singapore Savings Bonds and Singapore Government Securities.

B) Participating Endowment Plan with Guaranteed + Non-Guaranteed Return

This type of endowment plan participates in the performance of the Insurer’s Participating Fund in the form of bonuses that are not guaranteed. By purchasing a participating plan, your premiums will be pooled together and invested with premiums from other policyholders in the Participating Fund.

Guaranteed Return: The minimum amount the policyholder will get regardless of market performance.

Non-Guaranteed Return: The performance of the Participating Fund affects the non-guaranteed bonuses or dividends paid to you. As a policyholder, you will share in the risks of the Participating Fund, including:

  • Investment Risks: Lower than expected investment returns earned by the fund
  • Insurance Risks: Higher than expected claims made by policyholders
  • Expense Risks: Higher than expected expenses incurred for managing the Participating Fund

There are usually 2 types of bonuses: reversionary bonuses and terminal bonuses. As mentioned, these bonuses depend on the investment return on the Insurer’s Participating Fund.

Reversionary bonus will usually be declared annually. Once any reversionary bonus is declared, it will be added to the policy at the policy anniversary and becomes guaranteed.

Terminal bonus is an additional bonus which may be payable on the death of the life assured or maturity of the policy.

In short, these policies are actually designed to have upside from the guaranteed return for the investment risk the policy owner takes in the Insurer’s Participating Fund.

Insurers generally try to avoid large fluctuations in the non-guaranteed bonuses from year to year by smoothing bonuses over time

The projected investment returns earned by an insurer’s participating fund does not equate to the actual return that you will be getting from your endowment policy. The 2 columns of “non-guaranteed return illustrated at 3.00% & 4.25% investment return” means, if the Insurer’s Participating Fund is making an investment return of 3.00% or 4.25% respectively, your policy would get that illustrated amount of bonus allocation respectively.  The projected return of the policy is illustrated as the yield to maturity in the policy’s Benefit Illustration or Quotation.

In conclusion, when evaluating a Participating Endowment Policy return, you have to consider:

1) Policy Competitiveness: is the policy providing competitive illustrated guaranteed + non-guaranteed return rates compare to other similar policies or other similar risk investment products.

2) Insurer’s Participating Fund investment return track record: every insurer announces Par Fund investment return every year, the official data is available on MAS website: Par Fund Return.

3) Insurer’s bonus allocation track record“Insurers that are doing well may not be generous with the bonus as distribution policies are not transparent, said a veteran. So even if some insurers are not frequently in the top quartile, they could be doing better with their bonuses.”

Please also always remember: historical performance may not be indicative of future performance.

And, note that Surrender value can be lower than the premium paid before maturity. It’s important to check the policy’s Benefit Illustration or Quotation on ‘break-even’ period whereby Surrender Value is equivalent to Premium Paid.

The guaranteed return in a participating policy tends to be lower than that of a non-participating policy. You’ll need to determine your risk appetite to see if you are comfortable with the investment risk involved in Participating Policies for a potentially higher return.

4) What is endowment policy best used for?

The most common uses of endowment policies are: providing for children’s education expenses, retirement and saving for personal goals.

An endowment policy is a popular financial tool for the following reasons:

A) Predictable Investment

If you absolutely need the money for a certain purpose by a certain date, you would have preferred that your money not be locked up in more volatile types of investments like stocks, when you need it.

Children’s Education Fund:

  • Endowment policies are a popular choice for parents to save for their children’s education
  • Endowment policies offer predictability by letting you plan such that it matures just as your child begins tertiary education.
  • The insurance element of the endowment policy is most useful in this context. Once you sign the policy, you know you will provide for your child’s tertiary education no matter what happens in the future.

Retirement Fund:

  • At retirement, income is key, income will determine your lifestyle.
  • It is important to build as much guaranteed income and use the variable income to combat external factors like inflation and lifestyle upgrade requirement.
  • Retirement Endowment policy is a very good tool to create a balanced retirement fund portfolio so that you have a good foundation of predictable income at retirement while your other more aggressive investment works to maximise your return at a higher risk.
B) Low Risk Investment Product

Endowment policies are generally considered a low risk investment.

Forced Savings:

  • Many young people tend to use endowment plans as “forced savings” plans.
  • This is especially helpful if you are not so good or discipline at budgeting.

Investment Purposes:

  • Endowment policy can be an essential component in your investment portfolio depending on your risk profile. 
  • The participating policy allows you to have some upside from the guaranteed return. 
  • This variable return typically adds up to have a higher return than fixed deposit while keeping the investment risk relatively minimal compare to direct investment to assets markets.

5) Last but not least

Prepare to commit to the period of the policy. Early termination of the policy usually involves high costs and the surrender value may be zero or less than the total premiums paid.

Make sure the product suit your risk appetite & financial goal. You should not purchase this product if you do not understand or are not comfortable with the risks of this product.

Read more on Endowment Policy:

This page Is published for general information only and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person.

The information contained in this webpage, including any data, projections and underlying assumptions are based upon certain assumptions, and analysis of information available as at the date of the webpage. 

Please refer to Important Info / disclaimer here.

Date: 26th Nov 2021

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