Are Long Term Saving Plans Worth Your Money

Updated: Mar 8, 2023

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When it comes to long term savings, one of the most commonly considered instruments is endowments (also known as long term savings plans)

When considering instruments with such long-term commitment, the main concern that most of us would have was the question: Is it really worth it or are there better, more suitable instruments?

In this video, we will be exploring the good and the bad of long-term endowments and whether or not it is suitable for you? I will also share my opinion and present some alternatives for you to consider!

Without further let’s get started

The good, the bad and the suitability

As a savings instrument, some long-term endowments do provide insurance coverage and what this means is that by saving through an endowment, you will have the certainty that the money will be there even if something happens to you along the way. This is suitable for people who are saving for the sake of others such as children’s education or spouse’s retirement fund.

Another good thing about long term endowments most of these saving plans allow for partial withdrawal during the duration of the savings. This is suitable for people who are saving for general purposes and may need that flexibility of withdrawals during the policy years.

Lastly, when it comes to certainty in returns, endowments do offer a higher degree of certainty as part of their returns are guaranteed by the insurer. What this means is that it will be less affected by the ups and downs of the economy and these are suitable for people with low-risk tolerance.

That said, nothing is free in this world.

If we were to look at a typical 20-year endowment plan, we will realize that the yearly return usually ranges from 2% to 3%.

Furthermore, while there are some guaranteed returns, the bulk of the returns are often derived from the non-guaranteed portion.

Essentially, the low yearly return of the endowment is the price for the features like coverage, withdrawal flexibility and certainty in returns.

If your focus is on the withdrawal flexibility with slightly higher interest as compared to your bank account or if you need the coverage during the saving duration, then perhaps an endowment savings plan may be suitable for you.

If your focus is on growth and returns, then perhaps an endowment saving plan may not be suitable for you due to the low return rate.

Personal opinion

Personally, I am not a fan of long-term endowments as I feel that the features of long-term endowment plans are not worth paying for.

With proper financial planning, you will be able to work around things like your coverage needs, withdrawal flexibility and even certainty in returns.

If you are someone who needs forced savings or if you just want an easy alternative apart from savings in a bank, then perhaps you should consider a long-term endowment.

If not, I strongly believe that there are better alternatives available that you can use to help accelerate your wealth accumulation progress and that brings me to my next section.

What are your alternatives?

The first alternative that you can consider is self-contribution to CPF Account.

The pros of using CPF as a long-term savings instrument is that the returns are guaranteed and it is higher when compared to instruments like bank account or endowments.

Furthermore, self-contribution to your special account through the Retirement Topping Up Scheme will provide you with tax savings which adds to the overall return.

The cons however are that you are unable to withdraw the funds within the CPF account until the age of 55 and provided that you have a balance that meets the Full Retirement Sum at that point in time.

While some people are turned off with the use of CPF due to flexibility, I would argue that with proper planning, the trade-offs between flexibility and return is worth it as you can easily provide for your short-to-med term cashflow needs elsewhere.

The second alternative that you can consider is to invest in broadly diversified investment funds.

The pros of investing are that it provides significantly higher returns in the long run as compared to CPF contribution, bank savings or endowments. For example, the S&P 500 typically returned an average yearly return of 10%.

Furthermore, by investing in funds, you retain the ability to withdraw your investment as and when necessary.

That said, the cons of investing are that you are subjected to investment risk as it is expected that the value of your investment will go up or down on a daily basis.

However, such risks can be mitigated if you have a long enough investment duration.

As we’ve seen from past performances, the risk of losing money significantly decreases over time and with a 20-year investment horizon, the probability of you suffering from a loss if you were to invest in a broadly diversified investment fund is at 0.1%.

All things considered, I strongly believe that if you sit down and plan out your finances holistically, it is unlikely that a long-term endowment plan will be suitable for you as the alternatives are clearly better provided that you integrate them into your financial plans carefully.

If you do not know how to get started with your financial plans or if you do not have the time to manage your investments, you can check out what I do here to see how you can benefit from my financial planning services and reach out to me directly.

Daniel is a Licensed Independent Financial Consultant with MAS and a certified Associate Wealth Planner that provides: