An endowment insurance policy is structured more like a savings account than an insurance policy and to help us easily understand the endowment policy, we can basically dissect the endowment policy into 2 main components- Savings and Insurance.

What’s an Endowment Policy and How does it Works?

(1) The Savings Component
For most endowment policies in the market, you can opt to save for a period of 12 years, 15 years, 18 years, 21 years, 24 years, 27 years or 30 years. For instance, if you choose a 21-year endowment policy, your savings will mature 21 years later and the policy will be considered void. At the end of the 21 year period, you shall receive a big fat cheque from the Insurance Company.

Most endowment policies allows you to make regular withdrawal, which is usually every 3 years once. Like any whole-life policies, you can also apply for policy loan. Regular withdrawal can affect the outcome of your savings, since every withdrawal you made will reduce the total cash amount in the policy.

(2) The Insurance Component
The insurance component is also pretty straighforward. In the event of a Death or Total Permanent Disability (TPD), you will be paid the Insured Amount. However, if you are diagnosed with Critical Illness, the premium of the endowment policy will continue to be paid by the Insurance Company, of course, until you kick the bucket.

In the case of the father setting up the endowment policy for his kid, the insurance component would work slightly differently. If the kid kicks the bucket first or suffer from TPD, the same thing applies- the Insured Amount stated in the Endowment Policy will be paid out, in this case, to the father. If child is diagnosed with Critial Illness, the Company will continue to sponsor the policy. Let’s say if the Father kicked the bucket first, suffer from TPD or diagnosed with Critical Illness, the Company will sponsor the kid until the policy matures.

For the scenarios shown above, you should refer to the Insurance Companies’ respective riders that is attachable to the endowment policy and understand the terms and conditions to fully take advantage of the policy.

Why an Endowment Policy?

So, after going through the mechanics of how an endowment plan works, what’s the purpose of getting one?

An endowment policy works great as a passive retirement fund. Since the policy does not actively invest in shares and equities, the returns from an endowment policy is somewhat predictable. For business owners who doesn’t contribute to KWSP, the endowment plan is a great substitute.

An endowment policy is also usually used to structure a child’s education fund, since it gives basic protection to the kid and most importantly, the policy allows waiver of premium should anything happens to the Payor.

Also, you can use an endowment plan to distribute your estate or to setup a trust fund. Compared to tangible assets like properties or jewelleries, the endowment plan is much more transparent and hassle-free.

Create Now Save Later or Save Now Create Later?
The underlying concept of an endowment policy is to create now and save later. This basically means that the moment you start an endowment policy, the amount of wealth is created on the first day itself. Say if you are thinking of saving RM 300,000 for 30 years, the endowment policy would create the RM 300,000 in paper value. If any misfortunate incident (either through Death, TPD or Critical Illness) should stop your contribution to this policy, the RM 300,000 will be paid out. That’s the “Create Now” phase. Hence, “Save Later” means you have the option of contributing to the policy regularly.

A typical example of “Save Now and Create Later” strategy is a normal savings account, whereby contributions is made now and the results is seen years later. You don’t get compensated if anything goes wrong in the wealth creation journey, since there’s no insurance componenet involved.

The Downside
Nothing good comes without drawbacks. An endowment policy should be setup with the appropriate contribution amount. Unlike a savings account, you are unlikely to be refunded in full if you decide to terminate the policy in the first 10 to 15 years of the policy.

Unlike an investment funds, the endowment policy lacks liquidity and aggressiveness. This means you should not expect double digit annual returns from your endowment policy.

And that wraps up the Endowment Insurance for this section. If you have any questions, do post it in the comments below.

In the next section, I am going to be covering on Whole-life Insurance.

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