To kick off the post, I'd like to disclaim that most of the "saving plans" mentioned in this article are officially known as Endowments and Annuities. The only reason why I've used the term saving plans is to make this article relatable. Clients are constantly telling me they are looking for "saving plans", thus the title of this article.
Introduction
Endowment and Annuities are mainly savings instrument that help people to save with potentially higher returns than typical bank accounts. In exchange for the projected returns, these plans typically come with a commitment period and may limit or be totally without liquidity during the commitment period of the plan. Early termination usually would result in losses. In this article, I'll try to cover the types of endowments and annuity plans in the market and some functional uses of these plans.
Insurance savings plans where you pay all the way
There are endowments where the premium term is the same as the policy duration. The day you stop paying for the plan is when you get all the proceeds of the plan. Typically such endowments allow you to get started with premiums as low as and some lower than $100/month. Such plans also typically do not have a very good yield.
Functional purpose
The core function of all endowment plans is disciplined savings. Such plans are suitable for people who wants to start a savings habit but do not have much resources. Naturally, if you want to save for a goal and save very little, you need to save for a longer period to attain the savings amount required as compared to someone with the ability to save more and will reach the same goal while saving for a shorter period.
Limited pay insurance savings plan
These are also very common endowments where you only are required to save for x amount of years, followed by wait for an additional x amount of years then you can get the full proceeds thereafter. Some common examples are your typical saving plans where you pay 5 years and wait 5,10,15 years before the plan matures. The yield are typically better than the plans where you save all the way because there is a lump sum to be compounded after the savings period ends prior to the maturity date.
Functional purpose
Such plans are useful for people who wish to save for a limited period of time only and they can wait for a longer period before they access their savings. Some examples would include ladies with the intention to stop work after starting a family or older working adults who might worry about their job security after a certain age. These individuals may appreciate these limited saving period plans as they can save while they are working and allow their savings to compound even when they have stopped work.
Insurance saving plans with maturities 99 and beyond
These are sometimes known as perpetual endowments. Such plans as the description says have maturities at 99 and even as long as 120. Very often, this means your entire lifespan. Having said that, these plans usually have a breakeven period much earlier either at the 15th or 20th year. After which, you have the flexibility to decide when you wish to withdraw your funds and how much you wish to withdraw.
Functional purpose
Such plans exists to solve a problem for people who face reinvestment risk when their saving plans mature after 10-20 years but they are nowhere near retirement yet. It is a common problem in the past where people will walk into banks looking for saving alternatives when their old endowments mature when they are in their mid 40s or early 50s. However, the problem they usually face is that short duration endowment plans give really bad yields and thus these people would have been better off to keep the money in a plan that can continue to compound till the day they really need the money.
Plans that pay you an income for a fixed period
Plans like these require you to save for a fixed period of time, may or may not require a waiting period and thereafter pays a monthly/yearly income to you for a pre-agreed period of time. Typically such plans are also known as retirement plans. Unless you have a huge budget, usually people will choose a stipulated income payout period instead of lifetime because it will allow them to maximise their savings and get a higher income during the payout period.
Functional purpose
An income over a fixed period is typically used for retirement. Often such plans have a much higher guaranteed return than other endowment plans. As retirement usually mean no income, an income plan is highly popular as it proxies a salary during your working years.
Plans that give you the flexibility to make withdrawals
Such plans are very popular as it seems to mimick your savings account. It gives you the flexibility to withdraw a percentage of your savings usually at the end of the 2nd year of your savings period. Obviously such flexibility does not come for free. It usually means the yields are unattractive just like your bank accounts. Of course, given the commitment period, it's still better than your typical bank account.
Functional purpose
Just like the plan where you save all the way, its core function is to enable you to have a disciplined savings. It's very useful for people who are worried about liquidity and need some form of assurance on flexibility before getting a savings habit started.
Annuities
Annuities are plans that pay you a yearly income for life. You can participate with either a lump sum or a regular savings amount for a fixed period. It's similar to your CPF but the guaranteed interest is not as high. Of course, you get to stipulate how much you wish to save and for how long unlike the CPF which is a national initiative.
Functional purpose
Annuities basically give you income for life. The functional purpose is basically to supplement your other resources in providing more income which can be used to replace expenses and pay for certain lifestyle habits.
Given that there are so many different forms of saving plans in the market, it's important to find the most suitable one to match your specific need. In order to achieve this, please speak to a trusted adviser. You can also drop me a message if you like.
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Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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