With the rising costs of just about everything these days, the future seems so terrifying. But if you prepare for it the right way, there’s no need to worry.
An option that you may consider is an endowment plan. Read on and find out how it works.
What is an endowment plan?
An endowment plan is one of the more traditional types of life insurance plans that offer protection and savings.
It works by helping you save regularly over a specific period of time, after which you will receive an amount upon maturity in a lump sum or in monthly payouts.
Endowment plans are in place to give the policyholder insurance coverage, as well as a living benefit should they survive the policy.
Should something happen to the policyholder, the appointed beneficiary shall receive the returns as a death benefit.
What are the features of an endowment plan?
An endowment plan usually has the following features:
- Savings and protection components
- A fixed period of paying premiums (monthly, quarterly, semi-annually, or annually)
- A predetermined maturity date when the policyholder will be paid
- The maturity amount or sum assured to be paid out to beneficiaries in case of policyholder’s demise, or to the policyholder should he outlive the policy
- An option to have additional riders, such as accidental death, partial or total disability, critical illness, or hospital cash benefits to enhance the life coverage
Who should have an endowment plan?
People who have a regular monthly income can opt to have an endowment plan.
The same for those who want to save and receive a significant amount of money after a period of time.
An endowment plan is also ideal for people who spend an excessive amount without having any financial plan.
Having this type of plan will help them prepare for their future and develop a disciplined way of saving.
If you’re not so good at taking risks but want something that will still give you good returns, you may want to consider this plan.
Basically anyone who wants to achieve their long-term financial goals can get themselves an endowment plan.
Why should you get an endowment plan?
An endowment plan protects you from market fluctuations. No matter how the market is performing, you are guaranteed a return.
When you have an endowment plan, you can use it as contingency funds as well.
You can borrow from your policy when you have a financial emergency instead of taking out a loan from your bank or withdrawing funds from your VUL plan.
The endowment benefit that you will receive upon maturity will also give you a regular stream of income for a certain period of time.
It’s good if you’re just starting out in your career or with your business because it will give stability to your financial portfolio.
Having an endowment plan will also improve your saving capacity.
What are the things that you should consider when getting an endowment plan?
Before you get an endowment plan, consider why you’re getting one, which endowment plan you’re getting, and what your present situation is.
Are you getting an endowment plan because you want to have money for your retirement? Or is it to fund your home renovation or to pay for your children’s college education?
Also, when you do you want to get the money, and how much do you want to receive?
Do you want it as a lump sum or in monthly payouts?
Are you ready to take risks, and how much risk are you willing to take? This translates to how long you’re willing to not touch your money.
When you know why you want to get an endowment plan, it will be easier for you to know which endowment plans are right for you.
You also need to assess your current financial situation and how much you can set aside monthly.
What are your lifestyle patterns? Endowment plans are long-term commitments, and the insurance premiums are usually higher compared to traditional whole life insurance plans.
Figure out how you can get an endowment plan without overcommitting your financial resources.
Last but not the least, learn as much as you can about the endowment plan you’re getting.
Choose whether you want a participating or non-participating plan. If it’s the former, make sure that you read the fine print about both guaranteed and non-guaranteed payouts.
Endowment plans that offer a high payout usually have trade-offs which you need to be aware of.
Keep the riders to a bare minimum because they affect your ROI. Do your own research and find out about the company’s track record and financial stability.
Find out which services are being offered and what their claim settlement ratio is.
If you can compare quotes from different insurance companies, do it so you will have more options.
Pros of having an endowment plan:
An endowment plan is less volatile and more predictable compared to other investment saving products.
This makes it a good option when it comes to having funds at a given time in your life, like when your children start college, or when you need to purchase a property, or when you are about to retire.
You are guaranteed returns for your investment. And with the right riders or insurance options, it will also protect you or your beneficiaries when the unexpected happens.
Having an endowment plan also cultivates the good habit of saving and planning for your future.
Cons of having an endowment plan:
It’s a long-term commitment, so you will need to be on a strict budget to make the payments each time.
This means prioritizing your insurance payments over that girls trip to Tokyo, or buying that humongous smart TV, or redoing your whole kitchen.
Because an endowment plan has a shorter coverage period, it matures quickly as well, usually in 10, 15 or 20 years. This means that your monthly premiums are higher as well.
Should you make changes in your endowment plan, like preterminating it, there may be penalties incurred.
When you are paid out with a lump sum upon maturity, there’s also a reinvestment risk.
You may spend it on things you don’t really need, or you may invest it again in risky ventures that bring new additional costs for you.
The Bottom Line
Endowment plans are a great way to be protected and to have savings for the future. However, they pale in comparison to other life insurance savings options.
They don’t offer a whole life insurance coverage or enough savings that will last you for life.
Still, it’s good enough if you just want to have savings that you can use after a certain number of years.
Endowment plans require commitment and discipline. If you’re irresponsible with your money, no financial product can provide you with 100% protection and savings.
At the end of the day, whether to go for an endowment plan or not is still a personal preference. It may offer limited benefits, but it also offers a degree of stability.