Endowment vs insurance savings vs bank savings: What's the difference?

Here’s an in-depth comparison of endowment plans, insurance savings accounts and bank savings accounts — the difference could get puzzling.

Where conventional bank accounts offer flexibility and convenience, endowment plans foster steady savings growth over time. And then comes insurance savings accounts, which seem to offer the best of both worlds.

Although all three can help you build up savings, each one is actually better suited to a particular use. What’s the difference between endowment plans, insurance savings accounts and bank savings accounts, and which one should you choose?

• Endowment plan
• Insurance savings account
• Bank savings account

Comparison between endowments, insurance savings accounts and bank savings accounts

Endowment plans

An endowment is a type of insurance plan that focuses on building up savings over a long time period.

Although regular endowment plans typically offer durations of 15 years or more, there has been a crop of short-term endowment ‘upstarts’ that lets you grow your savings over five to 10 years. 

When you sign up for an endowment, your money is put into investments such as funds and bonds, with the aim of growing your savings over time. 

Most endowments offer the option to add insurance benefits that cover you during the duration of your plan, such as death, critical illness and accidental death.

The amount of coverage is determined at signup, and stays consistent until the plan matures.

What are the returns?

A major selling point about endowments is their high interest returns; your insurer may offer you fixed returns of 3 per cent per annum, and projected returns of between 3.25 per cent and 4.75 per cent per annum. 

Yes, these rates are much better than the 1 per cent to 2 per cent per annum from banks or other savings accounts, but you should know that endowment rates are often not fixed and subject to change (that’s what ‘projected’ means).

What are the risks or disadvantages? 

When you examine the policy documents, you will see that your returns are split into two components: a guaranteed sum and a non-guaranteed sum.

The guaranteed sum is often lower than premiums paid, leaving the non-guaranteed sum to make up the shortfall and provide any real gains. 

That means you may end up actually losing money investing in an endowment, if for some reason, the non-guaranteed portion gets completely wiped out on the market. 

[[nid:495475]]

Granted, that would take an unusual occurrence. Before you sign up, you’d want to think about whether you can stomach the risk, however miniscule. 

Premiums are fixed throughout, and you may not lower your premiums during your plan — not without incurring heavy losses. You may, however, top up if you wish to invest or save more.

Endowments also do not allow you to make withdrawals; if they do, you are limited to a fixed sum once a year. 

With fixed premiums and controlled withdrawals, endowments are restrictive. However, it is precisely why an endowment plan is excellent for reaching a savings goal in a controlled, predictable manner.

Who is it for?

Endowments demand disciplined savings, and rely on compounding interest to generate decent returns. Surrendering your plan early can result in losses, while making too many withdrawals will disrupt your returns. 

You may find endowment plans useful if you’re committed to save for the long haul, but need ‘enforced discipline’ to reach that long-term goal.  

About long-term goals, new parents who want to put together a university education fund for their newborn would be an example of an endowment target audience.  

Insurance savings account

We recently covered this new class of insurance savings plans, which offer an alternative cash savings management tool that also comes with insurance protection. 

As these are also insurance products, let’s differentiate them by terming them ‘flexible insurance savings accounts’ here, with ‘flexible’ being their major defining characteristic. 

Apart from a minimum deposit to start your account (ranging from $500 to $2,000), flexible insurance savings accounts don’t require you to make regular deposits (the way endowments require mandatory fixed premium payments). 

You are also free to make withdrawals or spend from your account as you like, and you will earn interest returns as long as your account is active and your deposits are above the minimum threshold, just like a regular bank account. 

What are the returns?

So far, we’ve seen these accounts offering between 1.8 per cent to 2.5 per cent per annum in returns, but these may or may not be guaranteed, depending on the provider.

Also, returns typically fall off after an initial period, or when crossing a dollar amount threshold. 

On top of earning interest on the money in your account, you will also gain insurance protection in the form of critical illness or death benefits, typically equivalent to 101 per cent to 105 per cent of your account value.

What are the risks or disadvantages? 

So therein lies the rub: The amount of insurance coverage you receive depends on the amount of money you have, which means that you need to have a significant sum in your account to have the insurance coverage you want. 

If you make a withdrawal, your insurance coverage will drop correspondingly. This might still be manageable. Just limit your withdrawals to maintain your desired insurance cover.

[[nid:483616]]

Our recommendation is (if you really do need to withdraw) to do it on the amounts in excess of the threshold — you’re not going to be earning the advertised interest rate on them anyway.

So while such insurance saving accounts offer a higher degree of flexibility, fully benefiting from their features takes some work.

You’d have to balance everyday spending against consistently growing your account balance until you reach your desired insurance coverage level. When you do, you’ll need to work on maintaining your account value. 

However, you are free to make deposits or withdrawals at your discretion, with none of the usual penalties or charges found in more traditional insurance plans.

Therefore, you are highly unlikely to make a loss from using a flexible insurance savings account. 

Who is it for?

This may be ideal for those seeking a flexible cash/savings management solution with slightly more attractive interest returns, with the added advantage of insurance cover.

However, do remember that the benefits provided are limited (covering only death and maybe critical illness), and you may need to add other plans to achieve all-round coverage. 

Bank savings account

Out of the three, bank saving accounts are probably the most familiar and straightforward. You open an account to store your money, making deposits and withdrawals as the need arises. 

You can typically attach an ATM or debit card to your account, or internet or mobile banking, allowing you to withdraw cash or make payments. You can also set up automatic deposits or payments on your account. 

Bank accounts have different fees and charges, such as fall-below fees, or overdraft fees. A minimum sum is usually required as an initial deposit.

You may also have to maintain a newly opened bank account for a number of months, or incur a penalty for early termination. 

By default, bank savings accounts don’t come with insurance coverage, although your bank may offer life plans for separate purchase. 

What are the returns?

You will earn interest on your deposits, calculated at varying rates according to the type of account you open. 

Bank savings account interest rates in Singapore aren’t the most exciting, hovering anywhere between 0.5 per cent and 2 per cent per annum. But for a start, you could check out our guide to the best high-yield savings accounts to park your money.

What are the risks or disadvantages?

[[nid:491337]]

The main disadvantage of using a bank savings account is the low interest offered. At the current rate, you’ll struggle to see any real growth in your money. 

Also, the low interest also means storing all your money in a savings account makes you susceptible to inflation risk (but to be fair, this also applies to endowments and insurance savings plans).

On the other hand, bank accounts are virtually risk-free, flexible and easy to use for managing your liquid assets. You can even open a bank account online in minutes. 

Who is it for?

If you simply need a handy account for your everyday spending needs, a basic bank savings account may be sufficient to serve you well. 

This article was first published in SingSaver.com.sg.