Should You Reinvest or Payout Your Mature Policy Payouts?
Finally! After years of waiting patiently for your money to grow, your policy is about to mature and you are getting ready to receive a payout that exceeds what you have paid so far. Depending on your policy, you might receive this either in a lump sum or in regular monthly payouts.
But before you happily stash your payout away in a savings account, why not consider reinvesting it?
Why You Should Reinvest Your Money
Reinvesting your payout is a smart move if you do not need to spend it right away, such as if you have initially invested your cash for retirement, but still intend to continue working for several years.
When you first signed up for your policy, you did so to enable your money to grow and beat inflation for the duration of the policy.
However, once you receive your payout and put it into a bank savings account, your money only grows at a lower interest rate. This becomes a problem if there are still some years to go before you need to use the money, as inflation will erode its value over this period of time.
Reinvesting money paid out from maturing investments by putting them into a subsequent investment lets it continue growing. This in turn enables you to reach your financial goals faster and protect the money from being eroded by inflation until you need it.
The good news is that when you invest your money, it actually grows at a faster pace than you might think, thanks to compound interest.
Let’s say you have an investment of $10,000 that grows your money at a rate of 4% each year.
After 20 years, how much would you have earned? If you answered $8,000 (4% x $10,000 x 20 years) in investment gains, you are wrong.
That’s because each year, you earn 4% on not only the $10,000 initially invested, but also on any interest you have earned up to that point. As your gains rise over the years, your annual investment gains also rise.
So, after 20 years, your $10,000 investment would actually have grown to $21,911.23, reflecting gains of $11,911.23.
What this means is that the earlier you reinvest your payout, the more time it has to grow and the greater the gains you can enjoy. This enables you to reach your ultimate goal, be it retirement or something else, at a faster pace thanks to the power of compound interest.
How Do You Know if You Should Reinvest?
The big question to ask when you receive your policy payout is: how much more time do you have before you need to use the money?
Short-Term Goals
In some situations, you might find that you need the money fairly soon, such as if you have been saving for your child’s education and your child is due to enrol into university in one or two years’ time. In such a situation, you may wish to consider putting the money in a high interest savings account or a 12- or 48-month fixed deposit, so it is easily accessible when you need it.
Medium- to Long-Term Goals
On the other hand, if there are several years to go before you need to use the money such as buying a bigger house or saving for retirement, you should consider reinvesting it for the medium- or long-term as there is still a sufficient timeframe in which your money has the chance to grow further over the next 10 years or so.
To make it easier to understand, let’s imagine two friends, Kevin & Prakash, both aged 45 and who have both been preparing for retirement with the help of an insurance savings plan. After saving for many years, they’re both due to receive their maturity payouts of $100,000 this year, but do not need to use the cash until they retire at the age of 65.
(Note: The figures used are for illustrative purposes only and are rounded to the nearest dollar.)
Let’s say Kevin deposits his $100,000 into a typical savings account, offering him an interest rate of 0.05% p.a. When he turns 65, he will have $101,004.76 in the bank.
On the other hand, imagine Prakash decides to reinvest his money in Income Insurance’s Gro Retire Flex Pro insurance savings plan with a single premium of $100,000. He chooses to receive regular retirement income spread over 20 years, starting from one year after the policy anniversary on which he reaches 65 years. At the end of that year, he’ll have received a total retirement income of $15,144 spread over 12 months.
At the end of the 20-year payout period, Prakash would have received a total illustrated payout of $302,885 from the stream of regular income. (Note: These figures are non-guaranteed and are based on the assumption that the life participating fund earns a long-term average return of 4.25% p.a.)
Should the long-term average return be 3.00 % p.a., Prakash would receive his first yearly illustrated retirement income of $10,773. At the end of the 20-year payout period, he would have still received a total illustrated payout of $215,463 from the stream of regular income.
As you can see from these two imaginary friends, reinvesting your payout offers you the opportunity to enjoy a much more comfortable retirement, like Prakash. Having reinvested his payout from his first policy, he ends up with much more than Kevin.
Furthermore, Gro Retire Flex Pro provides protection in the event of death1 and terminal illness1 as well as additional coverage against accidental death2,3 and disability2,4, allowing Prakash to enjoy additional peace of mind.
Types of Reinvestment Options
When considering whether to reinvest or pay in cash, there are several options to consider, each with its own set of benefits. Understanding these can help you make an informed choice suited to your financial situation and goals.
- Dividend Reinvestment Plans (DRIPs): These plans allow you to reinvest the dividends you receive from stocks or mutual funds back into more shares. This can be a powerful way to compound your investments over time, especially in a growing company.
- Stocks or Bonds: You can choose to reinvest your payouts by buying additional stocks or bonds. This is a good option if you’re looking to expand your portfolio and are comfortable with the associated risks.
- Real Estate: Reinvesting in real estate can be a lucrative option for reinvesting your payouts, offering the potential for both rental income and property value appreciation. However, it requires significant capital and comes with its own set of risks and responsibilities.
- Insurance Savings Plans: As seen with Prakash in the example above, reinvesting in another insurance savings plan can be a wise choice, especially if you’re looking for a combination of savings and protection.
- Retirement Schemes: If your goal is retirement planning, reinvesting your payout into the voluntary Supplementary Retirement Scheme (SRS) can be a beneficial strategy. As a complement to the Central Provident Fund (CPF), SRS contributions are eligible for tax relief and can be reinvested into financial instruments approved by the CPF Board. This alleviates your tax burden as well as ensures a more steady income stream post-retirement.
Tips for Effective Reinvesting
If you’ve weighed the pros and cons of reinvesting or paying out in cash and are leaning towards the former, here are some practical tips to optimise your reinvestment strategies:
- Evaluate your financial goals: Before reinvesting, clearly define your short-term and long-term financial objectives. Whether it’s retirement, purchasing property, or funding education, your goals will determine the best reinvestment strategy for you.
- Assess the risk: Different reinvestment options carry varying levels of risk. Understand your risk tolerance and choose an investment that aligns with your comfort level. Remember, higher risk can potentially lead to higher returns, but it’s important to be comfortable with the level of uncertainty.
- Diversify your portfolio: Don’t put all your eggs in one basket. Diversifying your investments can help manage risk and reduce the impact of market volatility on your portfolio.
- Stay informed: Keep up-to-date with market trends and economic conditions. This knowledge can help you make informed decisions about where and how to reinvest your payouts.
- Consider the impact of taxes: Different investment options have different tax implications. Be aware of how these could affect your returns and consult with a financial advisor if necessary.
- Reinvest regularly: If you’re choosing to reinvest in stocks or funds, consider a systematic investment plan which allows you to invest at regular intervals. This can help in averaging out the cost of investment over time.
Truth be told, when it comes to the option of taking a cash payout versus reinvestment, there is no single ‘best’ decision for everyone. Instead, what is the best decision for you will depend on factors like your risk appetite, current and projected financial needs, and so on.
However, if, like Prakash and Kevin, you are anticipating a policy payout soon and hoping to grow your wealth further, it’s a good idea to find out what options you have for reinvesting them. You may consider an insurance savings plan, or even an investment-linked plan like Income Insurance’s AstraLink or Invest Flex – many plans are flexible enough to let you choose your policy and premium terms so you can create a plan that suits your needs.
Have a policy that’s about to mature? Find out how you can reinvest your lump-sum or regular monthly payouts by speaking with an insurance advisor.
1 We will also pay any cash benefits and cash bonuses which have built up (accumulated). The policy terminates thereafter. Net premium(s) means the regular or single premium amount as shown in the policy schedule, or the reduced regular or single premium amount if a part of this policy has been cashed in earlier. If you change the frequency of your regular premium amount, we will use the then current regular premium amount to work out all net premium(s) paid. Net premium(s) do not include the premiums paid on riders.
2 For regular premium policy, Gro Retire Flex Pro includes Gro Retire Flex Pro – Protection Benefit, a non-participating rider, which includes the Accidental Death Benefit, Disability Care Benefit and Retrenchment Benefit. Please refer to the policy contract for further details.
3 If the insured dies as a result of an accident (before the anniversary immediately after the insured reaches the age of 70), we will pay an additional 105% of all net premium(s) paid, on top of the death benefit, as long as the insured was not taking part in a restricted activity at the time of the accident. If the insured was taking part in a restricted activity at the time of the accident, we will only pay an additional 63% of all net premium(s) paid, on top of the death benefit. We will pay this benefit only if the death happens within 365 days of the accident. Please refer to the policy contract for further details.
If you have appointed a secondary insured before the insured dies as a result of an accident (before the anniversary immediately after insured reaches the age of 70), we will not pay this benefit. Upon the accidental death of the insured, the secondary insured becomes the insured and the basic policy and its rider, Gro Retire Flex Pro – Protection Benefit, will continue.
4 Disability Care Benefit will apply upon diagnosis of the insured with any one of the conditions – loss of use of one limb, loss of speech, loss of sight of one eye and loss of hearing, arising from accidental injury or sickness during the term of the Gro Retire Flex Pro – Protection Benefit rider. The benefit will be paid according to the date of diagnosis. There are certain conditions under which no benefits will be payable. Please refer to the policy contract for the definition of each condition and the circumstances in which a claim can be made.
For policies issued by us that include a Disability Care Benefit, no matter how many of such policies we have issued for the insured, we will pay no more than:
- a total of S$3,000 for the additional amount, on top of the monthly cash benefit for the same insured; and
- a total of S$1.1 million, including additional monthly cash benefits, lump-sum benefit and premiums waived, under the Disability Care Benefit for the same insured.
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 Insurance 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.
These policies are protected under the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC). Coverage for your policy is automatic and no further action is required from you. For more information on the types of benefits that are covered under the scheme as well as the limits of coverage, where applicable, please contact Income Insurance or visit the GIA/LIA or SDIC websites (www.gia.org.sg or www.lia.org.sg or www.sdic.org. sg).
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