What are the factors that I have to consider when choosing an Endowment Policy?

Hi anon,

Here are a list of factors I would look at (non-exhaustive), comparing various plans across various insurers to ensure that I get the best plan that suits me.

• Flexibility: What are the premium terms I can choose? What is the minimum amount that I can contribute? If I have a lump sum, can I just choose a single premium?

• My own cash flow: Can I sustain the premiums with ease, even if I lose my job for a while? (For regular premiums only)

• Type of plan: Do I have a fixed maturity date in mind (choose a limited pay endowment with a maturity date)? Do I just want to save and leave the money to compound only to access it years down the road (choose a perpetual endowment)? Do I want to save for my retirement (a retirement income plan might be a better choice)

• Guaranteed return of the plan: What is my guaranteed return? (The higher, the better)

• IRR of the plan (true rate of return) based on non-guaranteed par fund performance: What can I expect to get if the insurer par fund performs well? A par fund return of 4.75% with an irr of, say 3.96%, all else equal, is better than a par fund return of 4.75% with an irr of 2+% return (yes, I've seen such numbers)

• Par fund returns: Track record of the insurer's par fund

• Optional riders: Will my premiums be waived if something (e.g. a CI) happens to me? Does the plan have such optional riders if I want to have this peace of mind?​​​

Maturity Period

To begin with, you will need to determine how long you can commit to the plan, e.g. 25 years. This is because you need to be able to afford the premium over the entire premium paying period.

Participating Cash Value

Secondly, we will look into the cash value where a portion of your premium is invested into the insurance company’s participating fund. With this in mind, it will be good to understand on how a participating fund works.

More Details:

What is a Participating Fund?

For the most part, it is important to understand the investment allocation made by the participating fund. For instance, one company may place greater emphasis on equities in order to give policyholders the same rate of return as compared to another insurance company that placed greater emphasis on bonds.

As a result, most of us prefer a more conservative route since it is unnecessary to take additional risk than required for the same return (to policyholders). Furthermore, this leads to higher expenses which will indirectly affect the policyholders (explanation in my post on participating fund).

Bonuses

Next, we will find out how we get our cash value in return through declared bonuses. Generally, there are termed as Reversionary Bonus and Terminal Bonus.

More Details:

Reversionary Bonus and Terminal Bonus Singapore

Different insurance companies may give a different rate of bonus to their policyholders. This is usually based on the sum assured in the policy. As always, the higher the rate, the more money that you get.

Also, take note that the compounding rate may differ too.

More Details:

What is Compound Interest?

Smoothing of Bonuses

Some of the insurance plans adopt the concept of smoothing of bonuses in order to give the same rate of returns to the policyholder.

More Details:

Smoothing of Bonuses Singapore

In order for smoothing of bonuses to work, the insurance company's participating fund must have proper track records and returns over time. Otherwise, there is simply nothing much that the fund can give to its policyholder.

As you can see, choosing an endowment policy is not as straightforward as it seems. Therefore, it pays to do research on your own or to seek professional advice to that end.

I share quality content on estate planning and financial planning here.