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What are endowment plans? When is maturity date important? Why should I look at the maturity date of an endowment plan? These questions and other similar questions, flood the internet space since the dawn of time. But don’t you worry, we are here to answer all of your queries. Endowments are long maturity plans which means their returns will be realized much later than that of other types of policies. This article talks about why you should opt for an endowment with a longer maturity period and how it will benefit you over time
You’re probably wondering why endowments with long maturity dates are so special.
Consider this: When we make a purchase, we want the best price and the most features. We pick the best phone because it offers the most features for the lowest price. It’s the same thing when we buy clothes; we go for quality and fit when choosing a shirt or pants.
The same goes for our savings plans. We should look at what gives us the most returns on our investment while protecting it from inflation at the same time. If you think about it, an endowment plan is almost like buying a long term insurance policy to protect your money against inflation. You pay S$50,000 now and it grows to S$140,000 in 30 years!
Of course, you do want to save money and make the most of it. In an ideal world, you’d be able to pick a term length that perfectly matches your needs. You’d put money away for just as long as it takes to meet your need, and then have it available in cash when you need it.
Unfortunately, life can be unpredictable. You might find that you need your savings earlier than expected. Or maybe you didn’t end up needing them at all. If this is the case with short-term plans, it’s even more true of long-term ones!
On one of the posts on our financial forum, we got this question:
I have heard that Endowment Plans are not very good. So is it a better idea to just put my money in the bank instead?
Endowment Plans are a popular life insurance product that offers protection and savings. When it is well-designed and explained, an endowment plan can be valuable for many people. But what if you’re one of those who think Endowment Plans aren’t good? What should you do?
Here’s what we told him:
If you’re worried about choosing the right term of your policy, then you have a valid reason to be concerned about Endowment Plans. Because most plans are for 10, 15 or 20 years, getting your terms wrong means committing to policies that do not meet your needs.
But there’s no need to worry! There are plenty of plans out there that will help you reach that goal. Let me introduce you to “Long Term Endowments”.
Let’s start by saying that there is no right answer when it comes to the maturity of a savings plan. If you feel like you will be comfortable with a maturity date at the end of the policy, then that’s for you. It could be that you won’t need the money anyway, or you have other avenues from which you can get the money in case of an emergency.
Still, we think that a long maturity date is important. This is because a longer maturity date means more flexibility. For example, if you have an endowment plan with a 20 year term and then something happens after 15 years (you lose your job or your business fails), then you can withdraw cash at that point. However, if the term was 30 years, then you wouldn’t be able to do that without making substantial loss.
What’s more, if the term is 20 years and your children are young, then they may not need need that money definitely. At that point in time, they might still be studying or looking for their first job. This is where having a policy with a longer maturity date can help them out financially when they begin to pursue higher education.
If your short term goal is to save money for a car in four years, don’t go for an Endowment with a maturity of 10+ years. Instead, choose a term that matches your goal.
But if you want to build up savings for your retirement or as an emergency fund, we still recommend longer terms. Why?
First, when you have a longer time horizon, you can afford to take on a little more investment risk. If you have only one or two years to build up some extra cash, you probably don’t want the risk that comes with investing.
But if you know that 10 or 20 years from now these investments will be worth at least as much — and likely more — than they are today, then it makes sense to take on this risk. That’s why it’s often said that “time in the market is better than timing the market.”
We recently received an email from a reader that asked a very interesting question. His query was along the lines of – “I am looking to invest in an endowment plan. Am I better off buying a 15-year plan or a 20-year plan?”
If you have not reached your retirement age, we understand the apprehension. However, you may want to look at the long term returns on endowment plans and make the best decision for yourself.
One of the benefits of endowment plans with long maturity dates is that they offer attractive interest rates. This is because the longer the tenure of your investment, the higher the interest rate offered to you.
There are some endowment plans that offer high interest rates and these plans come with a maturity period of up to aged 99, 120, or 125 years. As an investor, you will be able to earn a fixed amount of money upon maturity irrespective of market movements. In order to protect yourself against inflation, it is better to invest in endowment plans with a long tenure as it allows you to lock in for a longer period and enjoy higher returns.
How can this be? The answer is simple. Longer tenures provide insurance companies with the opportunity to invest in longer-term bonds that have higher interest rates than those with shorter maturities.
This, in turn, can help you earn a better rate of return on your savings.
Longer tenures mean more time for compounding
The power of compounding cannot be overemphasized. It rewards investors who keep their money invested for longer periods. Thus, when you choose an endowment plan with a tenure of around 20-30 years, you can enjoy the benefits of compounding for a long time and increase your savings significantly.
Longer tenures also provide enough time for investments to recover from market volatility. In the event of a market downturn, your investment will have enough time to recover as you get closer to the maturity date.
In addition, if held to maturity, there is little risk from market fluctuations since the returns are guaranteed by life insurance companies that back these plans.
As mentioned above, longer tenures also help insurance companies manage their risks better by ensuring that they have sufficient time to build up their reserves for paying out claims when the time comes.
So you’re wondering about the ideal term for your Savings Plan?
Well, let’s face it – different people have different needs. There are some who want to save short term, and others who want to save for a longer period of time.
However, if you set aside a portion of your income every month, and plan to use it only after a few years, then you’re better off choosing an Endowment Plan with longer maturity dates.
For example, if you invest $10,000 per year for five years in an Endowment Plan with maturity dates of 5 years and 8 years, then the Plan with 8 year maturity will fetch you much more than the one with 5 year maturity.
So don’t worry about choosing the right term for your Endowment Plans! Look at which ones offer longer maturity dates – they usually mean better interest rates and returns!
There are many types of savings plans, from a regular savings account to a term deposit. And then there are endowment policies.
Not all endowments have the same maturity date, but they all have one thing in common: higher interest rates and returns than other types of fixed duration plans.
Here’s how you can decide whether an endowment policy is right for you:
Choosing the right term for your Savings. If you’re looking to put your money away for a longer period of time and earn more interest, you should consider investing in an endowment plan. The most important thing to determine is how much you can afford to save each month and how long you can afford to save.
How much can I save?
The longer you save, the more interest you’ll accumulate on top of your initial investment, which means that your savings will really add up over time! But if saving for a long period of time isn’t something that fits into your budget right now, consider investing in a shorter-term plan instead. For example, if it took 20 years and $2500 per year to achieve your goal using an endowment plan with an 3.34% annual return rate, then only 10 years and $5000 per year would do the trick if you’re willing to shorten the premium payment instead! You can also help offset the risks by keeping to your budget of $2500, and starting another $2500 down the road.
For a lot of people, the financial planning process starts with savings. They want to save first and plan later.
As long as you have a savings every month, you can start your financial planning journey. We recommend that you look at an endowment plan with a maturity date of at least 15-30 years before committing your hard-earned money to it.
If you are wondering why it should be for such a long tenure, we’ll give you another reason to commit for this long: Compounding.
Compounding is the process of earning a return on your initial investment and then earning a return on that return. The longer you go without touching your original investment, the more it will grow.
The longer amount of time you invest, the more significant the effect of compounding will be. This is why it’s important to invest for a longer period of time – so that you can reap the benefits of compounding!
Longer maturity dates, better interest rates and returns, flexible withdrawal options and competitive interest rates. These are all benefits of choosing an long maturity Endowment Plan as opposed to a Fixed duration Endowment.
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