Endowment policy 101

Insurance can be a daunting topic for anyone, especially someone who is barely into his first year of work. It is important to understand the common terms in an endowment policy so that you can make an informed choice. After all, you wouldn’t buy the latest gadget without in-depth research. So why would buying an endowment policy be any different?

What’s an endowment policy?

endowment policy

An endowment policy is an insurance product that is designed to meet your savings goals and yet comes with an element of protection in place. They can be structured as participating (commonly referred to as “par”) or non-participating (“non-par”) insurance policies.

Endowment policies usually mature after a fixed period of time, such as 5, 10, 15 years or more. Do keep that in mind if you are balancing short and long-term financial goals.

Par policies: Premiums are pooled and collectively invested by the insurer for a rate of return in what is called a participating fund.

It is known as a participating fund as those who buy par policies are allowed to participate or share in the profits. These policies provide guaranteed and non-guaranteed returns, and the latter are paid in bonuses or cash dividends. The performance of the invested funds affects the non-guaranteed return.

Non-par policies: Pay fixed or guaranteed benefits unlike par policies.

An example of a guaranteed benefit is the amount that is paid when the policy matures. Premiums are not collectively pooled with the par fund. This means the policyholder, under the non-par policy, does not share in the profits of the insurer’s par fund, and is not entitled to any non-guaranteed benefits or bonuses as they are more commonly referred to.

When you buy an endowment plan, you normally get these documents in a pack: A guide to life insurance, a product summary and a policy illustration. It gives you an estimate of what your endowment plan is worth.

The nitty-gritty

endowment policy

Withdrawals: Some endowment policies allow you to withdraw cash, maybe annually. However, this is not a return on your premiums, but may come from your death benefit.

Withdrawing cash midway will also hurt your policy’s rate of return as the final maturity value will dwindle, and the net rate of return on that lower value will become negative. For instance, if the premium has a guaranteed interest rate of 1.8% p.a., any withdrawal will result in the interest earned being less than 1.8% p.a.

Annual bonus update: Shows you the bonus of your par policy.

Par fund update: Displays the performance of the par fund, the asset allocation and returns over the previous year and the same set of figures for the last three years.

When you buy an endowment fund, you are essentially putting your money into the assets the insurer is investing in. If you have a long-term horizon, you may wish to consider an option that you have control over.

Understanding the basic terms

Endowment policy basic terms table

Table source: http://www.straitstimes.com/business/invest/make-full-sense-of-insurance-policies

Note:
* By Year 10, the non-guaranteed portion of the death benefits - assuming 3.25% - would come to $34,943.
** By Year 9, the policyholder has paid $200,378 in premiums. Assuminga 3.25% return, his total surrender value is projected to be $161,804. Should he choose to surrender at this stage, he will get back less than the total premiums paid. If there is a bonus cut, the projected surrender value may be lower.
*** At Year 10, the maturity value - which comprises guaranteed and non-guaranteed values - is projected at $223,943, assuming a 3.25% return.

  • Policy illustration: Refers to the bonuses you can expect if the investment returns are achieved. Experts say investment returns form the most important factor affecting the bonus level declared. However, note that this is only applicable if you have opted for a participating policy and the bonus declared might not be the same as the achieved investment returns.

    Policy illustration rates: These indicate the level of bonuses you can expect from the policies if the investment returns are achieved. Again, note that this is only applicable if you have opted for a participating policy.
  • Illustrated at 3.25% or 4.75% investment return: Projections are calculated at a 4.75 per cent – which is the maximum best estimate return you may get – and a low of 3.25 per cent. These are used only for illustrative purposes and do not represent upper and lower limits of the participating fund’s investment performance.
  • End of policy year/age: This juxtaposes each year of your policy with your corresponding age so you can track the total amount or premiums you’ve paid each year as you get older, and it also shows when your policy will mature.
  • Total premiums paid to date: This tells you the total cumulative sum you would have paid from the start of your policy to the end of that policy year.
  • Total distribution cost: Refers to the cost the insurer pays to the distribution channel that sold the policy to you. For example, it includes payments for commissions.
  • Guaranteed death benefit: How much the insurer guarantees to pay if the insured person dies.
  • Non-guaranteed death benefit: An illustrated amount paid on top of the guaranteed sum. They can be paid as bonuses or cash dividends. It’s calculated based on assumed rates set by the industry, now 3.25 and 4.75 per cent. These rates came into effect since 1 July 2013, announced by the Life Insurance Association Singapore.

    There are two types of non-guaranteed bonuses: reversionary and terminal.
    Reversionary: Paid annually
    Terminal: An additional loyalty bonus. Insurers who pay higher annual reversionary bonuses may be able to match the benefit illustration rates, and vice versa.
  • Guaranteed surrender value: The amount you will get when you cancel the policy before the term ends. Surrendering the policy early usually means getting back less than the premiums you’ve paid.
  • Non-guaranteed surrender value: An illustrated amount to be paid on top of the guaranteed portion if you cancel the policy early.
  • Maturity value: What you will definitely get back when the policy matures, or when you hold it to full term.

Other terms you should know:

  • Basic sum insured: A guaranteed sum of money that is paid when the policy matures or when the insured person dies.
  • Withdrawals: Some endowment policies allow you to withdraw cash, maybe annually. However, this is not a return on your premiums, but may come from your death benefit.
    Withdrawing cash midway will also hurt your policy’s rate of return as the final maturity value will dwindle, and the net rate of return on that lower value will become negative. For instance, if the premium has a guaranteed interest rate of 1.8% p.a., any withdrawal will result in the interest earned being less than 1.8% p.a.
  • Annual bonus update: Shows you the bonus of your par policy.
  • Par fund update: Displays the performance of the par fund, the asset allocation and returns over the previous year and the same set of figures for the last three years.

When you buy an endowment fund, you are essentially putting your money into the assets the insurer is investing in. If you have a long-term horizon, you may wish to consider an option that you have control over.

Note: With effect from 2 July, “Benefit Illustration”' is now termed as “Policy Illustration”. “Projected” is now termed as “Illustrated”.

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