Should you consider endowments?
Investing in Endowments
What is an endowment?
An endowment is a financial pool where the capital is preserved and the returns are reinvested and/or used for various causes depending on the endowment’s purpose (i.e. university endowment fund for providing scholarships or fellowships).
In the Malaysian context, the most common endowment seen is an insurance investment plan or often known in layman terms as a savings plan. The function works similarly whereby you invest a fixed amount of funds over a period of years and will receive returns on schedule up to the maturity date whereby you receive a lump sum typically higher than your original capital.
- A secure low-risk investment where most of the returns are contractually guaranteed.
- Good endowments can provide higher returns than other low-risk investments i.e. fixed deposits.
- Good endowments provide high returns if the returns are reinvested with compounding instead of being withdrawn.
- Flexibility with your investment amount which does not need to be lump sum but divided up over X number of years OR can be placed all in up-front.
- Useful for those who want a largely automated way to save/invest at a better rate of return.
- Tax benefits as qualifies for the EPF & life insurance tax deduction (if you have yet to max out).
- A long maturity period to receive the full returns of the endowment which are often 20/25 (or longer) years. There are some “shorter” endowments of 10/15 years.
- If you end your endowment early, you will lose money. The break even point is typically half the maturity period for early withdrawals.
- Lack of control over what the endowment invests in as you don’t directly manage the endowment.
- Some endowment plans offer poor returns or over-promise & under deliver on returns.
Types of Endowments
- Traditional with profit: Returns are based on bonus profits from the basic sum assured & a maturity/terminal bonus.
- Traditional non-profit: A lump sum payment payable only upon death, total permanent disability.
- Unit-linked: Endowment premiums are invested in a unit trust & returns are based on the UT performance.
How to invest intelligently in an endowment.
While in most scenarios we would advise to keep insurance separate from investments (and an insurance is not an investment), endowments can be considered in certain scenarios.
- Only invest in endowments if you need to increase your asset allocation in lower-risk investments & even then only as a small part of your entire portfolio.
- Know your reason for the endowment investment as the investment horizon is long.
- Good objectives may be for retirement-related purposes, a fixed sum for travel/holidays annually or towards paying off for your long-term property loan.
- Your focus for the endowment would be returns thus to select an endowment with as little cost as possible goes into coverage (basic sum assured).
- Confirm the actual rate of return % of your endowment. Endowments typically state returns as % of basic sum assured which is NOT your rate of return.
- Check the history of the endowment including whether the endowment has ever returned below expected returns.