Why You Should Reinvest Your 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 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 a 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’s Gro Retire Flex Pro 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 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 coverage for death, terminal illness, disability care, accidental death benefit (before the anniversary immediately after the insured reaches the age of 70) and retrenchment benefit allowing Prakash to enjoy additional peace of mind.
Keep growing your money
If, like Prakash and Kevin, you are anticipating a policy payout soon, it’s a good idea to find out what options you have for reinvesting them so the money can continue to grow. One great idea is to purchase another savings plan, or even an investment-linked plan like Income’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.
Investments are subject to investment risks including the possible loss of the principal amount invested. Before committing to the minimum investment period, you may want to consider how long is your investment expectations or needs and whether you are able to keep up with the premium payment should your financial situation changed. Past performance, as well as the prediction, projection or forecast on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of the ILP sub-fund. The performance of the ILP sub-fund is not guaranteed and the value of the units in the ILP sub-fund and the income accruing to the units, if any, may fall or rise. A product summary and product highlights sheet(s) relating to the ILP sub-fund are available and can be obtained from your insurance advisor or online at www.income.com.sg/funds. A potential investor should read the product summary and product highlights sheet(s) before deciding whether to subscribe for units in the ILP sub-fund.
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.
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