With higher interest rates than bank savings accounts, endowment plans in Singapore can help you save money for your wedding.
Weddings in Singapore can cost tens of thousands of dollars. If you don't want to take a personal loan for your wedding, then saving up for it is the way to go. However, base interest rates provided by banks are at a measly 0.05%. When you consider the fact that the 2019 inflation rate is hovering at 1.33%, your savings will be worth less by the time you're ready to tie the knot.
Endowment plans offer higher base interest rates to grow your savings faster. They are also structured to help you save regularly while providing you flexibility to meet financial needs that arise.
Read on to find out how to use an endowment plan to save money for your wedding.
How Much Does a Wedding Cost in Singapore?
Holding a wedding in Singapore is no minor affair, both emotionally and financially. Even if you don't plan to have a fancy wedding, expect to easily pay anywhere from S$30,000 to S$50,000.
Here’s what a typical wedding budget might look like:
- Diamond proposal ring and wedding bands: S$5,000
- Bridal package: S$3,000
- Photography and videography: S$3,000
- Wedding banquet (20 tables): S$24,000
What is an Endowment Plan?
An endowment plan makes it easy for the average Singaporean to save and invest their money. They are a financial product offered by insurance companies, but they are focused on savings, not protection.
To entice you to sign up, insurers offer higher base interest rates than the banks. The catch is that you have to commit to saving regularly for at least 15 years.
Because many Singaporeans are afraid to lock up their cash for this long, endowment plans allow you to withdraw a portion of your account during the savings period. This makes it an ideal tool for saving money for your wedding.
Basically, your endowment plan splits up your premiums (40:60) into two accounts: a fixed account and a flexible account. The fixed account earns a higher interest rate than the flexible account. Withdrawals can only be made from the flexible account and usually from the third year onwards.
How Does an Endowment Plan Help Me Save For My Wedding?
To better understand an endowment plan, let’s take a closer look.
Amber, 21 years old, wants to settle down and have a family by age 36. She can save around $400 per month. An endowment plan for her could look like this:
Endowment Plan for Amber
Term: 15 years
Premium: S$400/month, or S$4,800/year
Guaranteed returns: 3.25%
Non-guaranteed returns: 3%
|Year of enrolment||Premiums paid into fixed account|
40% of premium
Interest rate: 3.25%
|Premiums paid into flexible account|
60% of premium
Interest rate: 3%
S$1,920 + interest from Y1
S$1,920 + interest from Y2
S$1,920 + interest from Y3
S$1,920 + interest from Y4
S$1,920 + interest from Y5
S$1,680 + interest from Y14
S$2,880 + interest from Y1
S$2,880 + interest from Y2
S$2,880 + interest from Y3
S$2,880 + interest from Y4
S$2,880 + interest from Y5
(Amber makes a withdrawal)
S$2,880 + interest from Y14
|Endowment plans do not allow you to withdraw your first year premiums.|
|Accumulated total in fixed account (A)||Accumulated total in flexible amount (B)||Total cash out at maturity = A + B|
At 31, Amber decides to get married. At this point, she has already maintained her endowment plan for 10 years. She can withdraw from her flexible account from Years 2 to 9, which amounts to approximately S$29,000, with interest of 3%, enough to cover most wedding expenses.
Five years later, at 36, Amber decides to start a family. Her endowment plan has also matured, paying out all the premiums she had paid over 15 years plus interest, less the amount withdrawn in Year 10. Amber decides to use this money to prepare for the arrival of her new child.
Why Use an Endowment Plan Instead of a Savings Account?
At first glance, an endowment plan seems similar to a savings account. However, there are main differences between the two:
|Endowment Plans versus Savings Accounts in Singapore|
|Endowment Plans (aka “Savings Plans”)||Savings Account|
|Fixed, regular payments|
(Premiums are non-negotiable. See below.)
|Flexible deposit amount and schedule|
(You deposit any amount, anytime you like.)
|Fixed savings period||Flexible savings period|
|Penalties for stopping payments||No penalties for stopping deposits|
|Limit on how much you can withdraw during savings period||No limit on how much you can withdraw at any time|
|Higher interest rate||Lower interest rate|
|Higher accumulated savings at end of period.||Lower or even no accumulated savings at end of period.|
Before using an endowment plan to save for your wedding, be aware of the following things:
1. Endowment Plans Require Regular Payments
An endowment plan is an insurance product, and like all insurance products, you are expected to make fixed, regular payments. These are known as premiums.
You can choose to pay premiums on a monthly, quarterly, semi-annual or annual basis. Do be aware that failure to pay your premiums will result in heavy penalties that cause you to lose money.
2. Endowment Plans Have Fixed Savings Periods
Unlike a savings account, you have to maintain an endowment plan for a fixed number of years, usually between 15 years to 25 years, depending on the insurer.
This is actually a good thing, as it allows your principal amount of money to grow over time. Thanks to the power of compound interest, the longer you hold your money, the faster your money snowballs and grows.
On the flip side, this also means your account will be cashed out once the endowment plan matures. You can choose to re-invest this amount in other plans, or use it to meet other financial needs.
3. Endowment Plans Have Limits On Withdrawals During the Savings Period
An endowment plan offers you some flexibility, allowing you to withdraw from your flexible account during the savings period.
If you happen to need more money than you are able to withdraw, then you’ll need to look towards other avenues, such as a personal loan or a credit line.
4. Your Premiums Cover All Fees
Like all insurance plans, your premiums cover the cost of all fees, commissions and charges. There should not be any further charges to be paid other than your premium.
Ask your financial adviser point blank what the fees are and how much goes to commissions. Alternatively, you can also look up “distribution costs” in your policy documents to find out what fees are charged.
5. Don't Terminate Your Plan Early
An endowment is useful, but make sure you can commit to the entire savings period before you sign up for one. Terminating a plan before maturity can result in a loss, especially in the early years. Most, if not all, plans give you back a grand total of S$0 if you terminate your plan within the first 2 years.
If you find yourself temporarily unable to pay your premiums, you can withdraw from your plan’s flexible account to pay your premiums in the interim. However, you need to have sufficient funds in your flexible account to do so.
Always speak to a qualified financial advisor before signing up for an endowment plan or any other investment product. Just as you need to be able to afford a wedding, so should you be able to afford the savings plan that will make it happen.
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By Alevin Chan
A Certified Financial Planner with a curiosity about what makes people tick, Alevin's mission is to help readers understand the psychology of money. He's also on an ongoing quest to optimize happiness and enjoyment in his life.