Short-Term Endowment Plans | Guide to Short-Term Endowment Plans
Investmentby Priyadarshini 3 January 2023
Because of low bank interest rates, even newcomers to finance are becoming interested in short-term endowment products. Short-term endowment plans are a viable alternative to savings accounts or fixed deposits due to their high returns, short commitment periods, and simple mechanics. Although it appears simple, the terminology surrounding endowment plans can be perplexing to those unfamiliar with insurance. In this blog, we give you a guide to short-term endowment plans.
Guide to Short-Term Endowment Plans
The premium is the amount you pay for (invest in) your endowment plan. It can be a single premium (a one-time lump sum payment) or spread out over months or years. Short-term endowment plans typically have a single premium.
The length of time it takes for the endowment plan to mature. Conventional plans can last 10 years, 15 years, 20 years, or even up to a certain age (e.g. 75 years old). On the other hand, short-term endowment plans have a maturity period of two to six years. If you terminate your endowment plan early, you may not receive the guaranteed returns or even your capital.
Some endowment plans have a ‘capital guaranteed’ maturity. This means that at the end of the policy term, you will almost certainly receive at least the amount you initially invested. If you cancel your plan before the end of the policy term, there is no such guarantee.
This is the amount of return on your initial investment at the end of the term, expressed as an annual percentage (e.g., 2% p.a.). Some endowment plans only provide guaranteed returns, whereas others may divide returns into guaranteed and non-guaranteed components.
Participating or non-participating
Endowment plans typically involve the insurer investing your premiums in a ‘participating’ fund on your behalf (although you do not get to select the investment portfolio). If the fund performs well, a participating policy allows you to receive a portion of the profits (the non-guaranteed return), whereas a non-participating policy does not provide you with anything above the guaranteed return.
A small portion of the money you put into an endowment plan is used for insurance. This is quite minimal for short-term endowment plans. For example, in the event of death or total permanent disability, you could be insured for 101% or 105% of the premium paid.
Endowment plans, particularly short-term and/or single premium plans, are not available indefinitely. They are instead issued in ‘tranches,’ much like Singapore Savings Bonds. Each tranche includes a set number of policies. Tranches with attractive returns close quickly, and if you miss it, you’ll have to wait for the next one.