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?
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.
Keep growing your money
If 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 or retirement plan – 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.
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.