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Nedgroup Life
Old Mutual
Allan Gray
Fairbairn Capital
Liberty Group

Understanding Endowment Policies

“Someone’s sitting in the shade today because someone planted a tree a long time ago.”  ~ Warren Buffett

An endowment policy is essentially a life insurance policy. However, it is the savings component that is usually top of mind rather than any coverage for death. The policyholder saves regularly through a controlled premium, and is able to realise a lump sum on the maturity date, provided of course, he or she has not died. In this way, endowment plans offer a disciplined way of saving money for future financial needs.

If death is the case, then the life insurance aspect kicks into action and any nominated beneficiaries will receive whatever money has accumulated through the monthly premium contributions invested. If however, as the policyholder, you have lived to the maturity of the fund, then you could collect a tidy lump sum that could be useful in adding to your retirement funding, or paying for children’s education, or buying a house, or paying off debts, etc.  

Key points to remember:

  • An endowment policy can be called into play if you have to deal with a financial emergency. You can cash it out when you wish – or at least a portion of it depending on the plan you set up.
  • An endowment policy is very useful for salaried people, small businessmen, and professionals who should look at this kind of plan to meet their long-term financial security needs.
  • If you are risk averse, and do not mind settling for lower returns while affording greater security of your funds, then an endowment policy is a good choice. The returns are lower because they are mostly risk free due to a guaranteed sum assured. It therefore suits a working individual rather than the wealthy.
  • An endowment policy should only be bought if you are certain of a steady income in order to pay premiums regularly. Buying an endowment/life insurance policy is a long-term commitment. Make sure you can afford the premiums.
  • The life cover element is an added advantage – and a great help to your family should you, as the bread-winner, suffer loss of life.
  • Tax benefits, subject to certain conditions, are also available on these returns. 
  • Unlike deposits, you must be prepared for the fact that you may not get back what you put in. While part goes towards insurance coverage, the rest is invested and therefore subject to risk. You will certainly not get back your input if you surrender the policy early.
  • If you don’t need the insurance coverage, the endowment policy may not be a suitable choice for you.
  • Always do due diligence. Compare the returns, features, and risks of the product against other investment products in the market.
  • The life insurance component will pay directly to the beneficiary on the death of the life assured. This is because, while the policy is still an asset in the estate for estate duty purposes, the proceeds do not physically form part of the estate, and therefore avoid executor’s fees. This means the proceeds can be paid out immediately to the beneficiary without the delay of being wound up with the rest of the estate assets.

Some questions you might ask:

What are the investment terms for an endowment policy?

The investment terms are generally 5, 10 or 15 years.

What are the tax benefits?

Favourable tax rules apply to endowment policies that result in tax-efficient savings after a minimum of five years. The proceeds of endowment policies after five years are generally exempt from personal income tax in your hands.

Are there Capital Gains Tax implications with regard to an endowment investment? 

Provided you remain the original beneficial owner of the policy, there is no CGT in your hands.

Can a withdrawal be made before the end of the term of the policy?

Yes, although this is not advisable, as you will incur penalty costs.

What are the minimum debit order and lump sum contributions required for setting up an endowment fund?  

In South Africa the initial debit order contribution is generally set at R500.00 per month, but all debit orders under R500.00 are subject to an annual escalation of 15% per annum. The minimum initial lump sum contribution is an amount of R5,000.00.

 Is there flexibility with regard to the debit order should the client become unemployed?

Yes, you can stop, reinstate, increase and decrease the debit order with a written, signed instruction sent your financial broker or insurance company.

Check your policies, check your life

Verifi is an online tool that provides you with an immediate and up-to-date overview of all your life insurance and investment policies by sourcing information from all the major life insurance companies – and presenting the information in a comprehensive report.

With VeriFi you are able, for no charge, to access information on all your life and investment policies at a glance. You are able to check the types of policies you have, the names of the insurance companies providing the cover, the nature and extent of the insurance cover provided – and other vitally important information such as the details on your policies being correct.

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