How endowment insurance plans work: Terms and conditions you need to know

In a recent complaint, a man who owned a 10-year endowment insurance plan in Singapore claimed to experience a 5 per cent drop in bonus and end up receiving $25,000 less in maturity value. Is it truly possible for the bonus of an endowment plan to differ from the original agreement? Or is it that the terms were wrongfully interpreted in the first place?

To demystify this complaint, this article will take a look at how endowment plans in Singapore work and how bonuses are allocated.

Endowment plans are bundled products that include both investments and protection coverage. Some of the best endowment insurance plans in Singapore are designed for planned savings and investment.

In Singapore, endowment plans’ interest rates range between 0.5 to 4 per cent per annum. A short-term endowment plan can mature as early as two to six years but a conventional one stretches over 10 to 20 years or up to a fixed age. Longer plans tend to enjoy higher interests over time.

Such policies can be beneficial for building up financial discipline since the savings component is built into the monthly insurance premiums. This is also one of the key reasons why parents are snapping up these plans to save for their children’s future education.

Participating, non-participating and anticipating plans

Endowment plans in Singapore are broadly classified in two categories and the payouts differ according to what you sign up for.

1. Non-participating plan

A non-participating plan is one that pays a guaranteed sum at the end of the policy term. This is lower risk than the participating one but also means you will not benefit from any bonuses if the investment fund performs well.

The term for guaranteed return will be clearly spelt out in the original agreement from the insurer and the final payout at maturity will never fall short of it.

2. Participating plan

This plan invests the premium you pay to the insurer’s investment fund and you will get to share in the profit. The eventual payout you’ll receive is split between a guaranteed return and a non-guaranteed return, also known as a bonus or cash dividend. The latter may fluctuate according to the performance of the fund.

Non-guaranteed bonus is the part that is slightly more complex because there are two types of bonuses.

Type of Bonus	Details
Reversionary Bonus	This bonus is declared annually and forms part of the guaranteed benefits of your policy. However, when you surrender the policy or the reversionary bonus, only a proportion of the reversionary bonuses will be payable since you did not fulfil the full term of the endowment plan.
Terminal Bonus	This bonus is a one-time payout when you end the policy early, make a claim successfully or when the policy matures. Longer-term endowment plans tend to receive a higher terminal bonus over time.

3. Anticipating plan

This is similar to regular endowment plans except that part of the sum assured is paid at pre-fixed intervals during the term of the policy. The remaining sum will be paid with the accrued bonuses at maturity.

The anticipating plan is available in participating and non-participating options too.

ALSO READ: Buying insurance during a recession

A valid complaint or misinterpretation of policy terms

Referring to the complaint that was mentioned at the start of the article, it is not likely that the bonuses that impacted the total maturity amount are adjusted without the policyholder’s consent. However, it is not always easy to interpret the terms and conditions of an endowment plan agreement. Reportedly, many policyholders had lodged similar complaints in the past.

In this case, it is unclear how the policyholder derived the short payment of $25,000. This participative plan with a reversionary bonus that fluctuates with the investment fund over the years could significantly affect the final maturity payout.

There is also a common misconception that the total premiums paid must be received in full at maturity, this is not the case with an endowment plan. Because part of the premium is allocated to protection cover and this amount will not contribute to the accumulation of bonuses as they have no cash value.

As a word of caution if you are planning to purchase an endowment plan, read the terms clearly to avoid such an incident from recurring. When in doubt, always clarify with a financial consultant before picking the best endowment plan in Singapore.

How to resolve a complaint

If you ever encounter a problem that involves a financial institution (FI), there are several avenues that may provide you with assistance to resolve the matter.

Contact the Financial Institution (FI) or insurer

The first party you should approach is the institution or the insurer itself to address the problem and put things right. Under the mandate of the Monetary Authority of Singapore (MAS) all FIs are required to handle complaints promptly and fairly.

Contact the FIDReC

The Financial Industry Disputes Resolution Centre Ltd (FIDReC) is an independent party that you can approach if the matter cannot be resolved directly with your insurer after six months.

Report to MAS

Even at the early stages of managing the dispute with your insurer or FIDReC, you can also choose to report the matter to MAS if you suspect wrongdoing or breaches by the FI. However, do note that MAS will not step in to resolve commercial disputes that must be settled between you and your insurer.

Get legal help

If all else fails, you may want to engage legal advisors to resolve the matter. This can be a costly attempt and if you need legal aid, you can seek help from the Legal Aid Bureau.

This article was first published in ValueChampion.