Why Your 20s is the Best Time to Get an Endowment Plan
Now that you’re in your 20s, likely earning your own money, you might want to consider building a disciplined savings habit. Life is only going to get more expensive from this point onwards, especially once you apply for a BTO or start a family. Your future self will thank you for planning ahead and amassing the resources you need from an early age.
There are many places to stash your cash, and an endowment plan is one of the best vehicles for that - especially if you’re still in your 20s. Here’s everything you need to know about endowment plans, and how you can use it to grow your savings.
What is an endowment plan?
Put simply, an endowment plan is a financial product, usually sold by insurance companies, that is meant to help you grow your money while staying protected. Typically, you put in X amount of money (called premiums) over Y period of time. At the end of the period, you’ll collect a maturity benefit, which is typically more than the total premiums paid in.
Endowment plans usually come with the following features:
Regular premium payments
Saving with an endowment plan typically involves paying regular premiums over a fixed period of time. How much premium you pay is usually decided by you, the policyholder, at the start of the policy term, which is helpful for developing a disciplined habit of saving regularly.
How often you pay the premium depends on the specific plan you choose. Many will let you decide whether you want to pay monthly, half-yearly, quarterly, or annually.
It’s worth noting that you sometimes get premium discounts for lump sum annual payments, which means more savings for you. But if you don’t have the cash for annual premiums, monthly or quarterly premiums are better choices.
Fixed maturity period
“Maturity period” simply means the amount of time your money needs to grow. Once it matures, you will receive a payout of the premiums you paid, plus bonuses from the plan, if any.
Endowment plans come with a wide range of maturity periods, from as short as 3 years and up to 30 years, depending on the specific plan. If you’re saving to meet a specific goal, try choosing a maturity period that gives you the payout when you need it. For instance, if you’re freshly married and wish to buy an endowment plan to fund your future child’s education fees, you might opt for a maturity period of 15-20 years. For longer-term goals like retirement, you might choose a maturity period of 30 years perhaps.
Guaranteed returns (usually) and bonuses
Once your endowment plan matures, you’ll finally see the return of what you have sowed. Endowment plans usually offer a guaranteed return amount, which is the minimum amount you’ll receive, regardless of how the plan performs. It’s important to note that this guaranteed amount can be higher or lower than the amount of premiums you’ve paid throughout the years.
On top of that, you might also receive (non-guaranteed) bonuses throughout the policy term. These are declared by your insurer to distribute profits of the participating fund among the policyholders.
Endowment plans are a unique hybrid product that combines savings and protection. The exact terms and conditions will differ from plan to plan, but generally if unexpected situations happen to you, your loved ones will receive a cash payout.
Why your 20s is the best time to get an endowment plan
When you’re in your 20s, things like getting married, buying a home, and retirement seem like distant dreams. You might be thinking, “Why save for it now when I’m only earning fresh grad pay?” or “I can afford to wait until I earn more, right?”
That’s actually not true. Any 30-something will tell you that the years fly by quickly, and building your savings is tougher the older you are. Though you might earn more in your 30s, you’ll also find that you have more financial responsibilities that get in the way of saving, such as a mortgage, caring for your parents, or raising children. Your spending habits will also naturally change - you might find yourself brunching more often or tempted to buy more expensive purchases.
Although you aren’t earning a lot at the start of your career, you do have one resource that higher-paid older Singaporeans don’t have: time.
When life’s important milestones are years away, and you have few financial responsibilities, saving is naturally easier. And because you have time for your money to grow, even a small amount set aside each month makes a huge impact.
Endowment plans are an ideal way to start because they force you to be disciplined and save. Make sure to keep up with your payments and before you know it, you’ll have amassed a small fortune.
Here are some other reasons why your 20s is the best time to get an endowment plan.
It's a fairly predictable, low-risk investment
Stocks and other pure investment tools can be a fast and exciting way to grow your wealth. However, if you’ve never invested in your life, you may want to consider starting out with a lower risk tool like an endowment plan.
When it comes to buying more volatile investments like stocks, you will fully bear the investment risk. The idea is to achieve a high rate of return, but there is an equally high chance that you will lose what you put in. That’s because you make all the decisions about which company to invest in, when to buy the stocks, and when to sell. For inexperienced investors, there’s plenty of room for error.
An endowment plan might make more sense for first time investors, since you bear less risk. A professional money manager will oversee the investment and make decisions for you. Before signing up for the plan, you also get information about guaranteed returns, which gives you a good idea of how much you’ll likely receive once the plan matures.
Compound interest gives you an advantage
When your retirement is decades away, you might think you have plenty of time to save for it. After all, you’ve barely started your career and still have a whole life to live.
However, saving for retirement in your 20s gives you an unfair advantage, thanks to compounding interest. This is the process by which the monthly premiums you save grow exponentially, because of the interest building up upon itself over time. Even a small amount can grow significantly over two or three decades. And with endowment plans, you get higher returns with longer maturity periods.
The inverse is also true: the longer you delay saving for retirement, the more you’ll need to invest every month. While it might be fun to spend your entire salary, it’ll be harder to save money aside the older you get. In fact, 35% of retirees are still working to fund their retirement years. Wait too long, and you might end up postponing your retirement and working well into your old age too.
Achieve mid-term goals with ease
What do you want to achieve in 10 years? Do you see yourself getting married? Making a downpayment for a home? Quitting your day job to start your own business?
Endowment plans aren’t just for retirement. You can use it to save for mid-term goals too. Simply choose a maturity period of around 10 years, so you can get your payout right when you need it.
Some endowment plans, like Income’s Gro Secure Saver, won’t even require you to pay premiums throughout the entire maturity period. For example, you can choose to pay premiums for 5 years of your 10-year plan. Once the first 5 years have passed, you can start saving for a different goal as you wait for your plan to mature.
How much should you put into a savings plan?
As a general rule of thumb, you should put 20% of your monthly salary (after CPF) into savings. Once you have saved 3 - 6 months worth of expenses into your emergency fund, you can explore putting any spare cash you have into financial tools like endowment plans.
The entire 20% doesn’t have to go into the endowment plan. Since this is a mid-to-long term commitment, it’s important for you to identify an amount you can comfortably afford to pay for the next 10 or so years. If in doubt, it’s best to commit a lower rather than a higher amount, as you can always purchase a second savings plan later on, but it’s usually not possible to reduce the regular premium you’ve committed. As always, it’s best to seek expert help if you’re not sure how big a sum you should commit.
Make the most of the time you have with the right endowment plan
It’s never too early to start saving for your goals, no matter how far off into the future they are. In fact, the sooner you take advantage of the time you have and start saving, the more wealth you can generate by the time you need it most. The longer you put off saving, the more you’ll have to delay your goals.
Putting your mid-to-long term savings in an endowment plan brings many benefits, especially if you start in your 20s. You get goal-based savings, insurance coverage, and long-term wealth, all in one product.
The best endowment plan for you is one that suits your unique needs and priorities. Explore the savings plans Income has to offer, or speak to an advisor for personalised help.
This article is meant purely for informational purposes and should not be relied upon as financial advice. The precise terms, conditions and exclusions of any Income products mentioned are specified in their respective policy contracts. For customised advice to suit your specific needs, consult an Income insurance advisor.
This advertisement has not been reviewed by the Monetary Authority of Singapore.