Fixed deposits and endowment plans are two popular investment options for individuals who are looking to grow their savings. However, when deciding where to invest in 2023, it’s important to understand the key differences between these two financial instruments.
In this article, we will compare and contrast fixed deposits and endowment plans, highlighting their benefits and drawbacks, to help you make an informed decision on where to invest your money in 2023.
Endowment Plan vs. Fixed Deposit
Fixed deposits offer a safe and secure way to earn a fixed return on investment for a short period of time, making them ideal for short-term investors. On the other hand, endowment plans are long-term savings vehicles that can be used to achieve specific long-term financial goals, such as retirement or education.
Here are the details to help you better understand the differences between fixed deposits and endowment plans.
| Characteristics | Endowment Plan | Fixed Deposit |
|---|---|---|
| Purposes | Suitable for goals like retirement or education. | Suitable for short-term investors with a maximum tenure of 3-36 months. |
| Risk level | Returns subject to interest rate changes in some plans. | Guaranteed investment amounts and interest at the expiry of tenure. |
| Returns | Policyholders get back premiums with returns and bonus, subject to interest rate changes. | Investors get back invested money and guaranteed interest. |
| Liquidity | Less liquid due to long-term structure with charges on early withdrawal or surrender. | Investors may only get back principal amount on withdrawal before expiry. |
| Tax benefits | CPF savers can use tax-deductible premiums paid for long-term investment. | CPF savers can use fixed deposits for tax savings. |
| Flexibility | Penalties occur if policies surrendered before expiry. | Fixed deposit investors get only principal amount without any return. |
| Maturity period | Various maturity options from 2-20 years or a max age of 75. | Shorter investment horizons from 3 months to 3 years. |
| Regular payouts | Allows regular payment schedule options and lump sum payment. | Only allows lump sum payment with fixed tenure. |
| Insurance coverage | Offers insurance coverage with 102-105% of contributed premiums, if an insured dies, becomes disabled, or gets critical illness during effective policy period. | No insurance elements; successors get back the principal amount without interest except for maturity date if an investor dies. |
| Inflation protection | Some endowment plans allow increasing savings and protection by increasing premiums in line with inflation. | Fixed deposit accounts do not offer inflation services. |
More Details on Fixed Deposits
A fixed deposit, offered by financial institutions like banks or other finance companies, has a fixed tenure allowing an investor to receive a principal with specified interests on maturity. Usually, a depositor treats a fixed deposit account as a short-term parking place for other purposes later though the maximum term can reach up to 36 months.
1. Types
- Short-term fixed deposits: Typical fixed-term deposits range from 3 to 6 months, while terms, such as 1 or 2 weeks, are not unusual.
- Long-term fixed deposits: Tenure options range from 1 to 3 years. Investors with a longer investment horizon can opt for a longer-term fixed deposit to earn higher interest.
- Foreign currency fixed deposits: You may choose foreign currencies for fixed deposits to take advantage of favorable currency rates or interest rates. A financial institution converts SGD into foreign currencies and opens a foreign currency fixed deposit account for a fixed tenure as required.
You should know risks of loss may incur due to exchange rates upon expiry. Banks offering the deposits may differ among exchange and interest rates, so you should research before deciding.
2. Features
- Multiple fixed-deposit tenure options: Interest rates for fixed deposits go from the lowest for the shortest tenure to the highest for the longest.
- Safe investment: They are low-risk investment tools with guaranteed rates and principal amounts.
- Zero fees: Fixed deposits incur the least charges, allowing investors to get back a full amount on early withdrawal without interest.
3. Pros and Cons
Advantages
- Investment safety: Fixed deposits are low-risk, principal-and-interest-guaranteed investment products. Investors can get back money with the return if committing to a required tenure. Depositors can even have cash protection for up to SGD75,000 covered by the Deposit Insurance Scheme of Singapore.
- Liquidity and flexibility: As one of the most liquid assets, fixed deposits let investors cash out in the shortest period. They are highly liquid and convertible into cash or cash management accounts.
Disadvantages
- Lower returns: An average interest rate for an SGD fixed deposit is 0.92%, while an average interest rate for a 36-month fixed deposit is 1.2%. Most investors stay away from long-term fixed deposits due to lower rates of return.
- Tax implications: Though CPF investors can benefit from contributions to CPF investments, including fixed deposits, they would choose investments with potentially higher returns to increase their wealth. The tax incentive for investing in foxed deposits is only available to CPF investors.
- Inflation risk: Returns from fixed deposits cannot beat accelerating inflation in Singapore. An interest rate of 1.2% per year from a 36-month fixed deposit cannot outpace an average inflation rate of 2.85% by 1.65% in Singapore. High inflation may erode purchasing power and cause capital loss.
More Details on Endowment Plans
An endowment plan is a savings-oriented product with insurance elements offered by non-banking financial companies. Savors can choose multiple tenure options, from 5 to 40 years, to meet personal financial goals. At expiry, investors get back their premiums with interest returns.
A typical endowment plan offers regular premium options like monthly, quarterly, half-yearly, and annual payments, so clients have the investment flexibility to suit their financial circumstances. Besides, some insurance companies provide a lump sum payment option, besides regular premium payment terms, for more investment choices.
1. Types
- Participating endowment plans: A participating plan allows investors to join an insurance company’s performance fund and get a share of profits besides guaranteed cash benefits. At the policy end, the insurance company pays a policy owner guaranteed cash and performance bonus.
- Non-participating endowment plans: Investors for these plans will not share an insurance company’s profits but will get back a guaranteed sum at the end of a policy term, like 5 or 20 years.
2. Examples of participating and non-participating plans
Participating plans:
Mr. Goh buys a participating endowment plan for annual premiums of SGD8,000 for 20 years. The policy states Mr. Goh will receive a guaranteed cash value of SGD190,000 + a bonus, depending on the fund’s performance. At expiry, the insurance company declares a bonus of SGD50,000 to Mr. Goh. Therefore, Mr. Goh will receive SGD240,000 = 190,000(guaranteed cash value) + 50,000(bonus.)
Non-participating plans:
If Mr. Goh chooses a non-participating plan for the same amount, he will receive a guaranteed sum only at policy expiry, depending on an insurance company’s calculations.
3. Features
- Standard life insurance benefit: Like other life insurance policies, endowment plans also provide life insurance or additional riders to policy owners. Some riders waive and pay for premium payments in case of an insured’s disability or critical illnesses.
- Multiple premium payment terms: A range of payment terms are available to investors matching their financial goals.
- Flexible investment options: Participating endowment plans offer to share profits with clients besides guaranteed cash benefits, while non-participating plans distribute guaranteed cash values only.
4. Pros and Cons
Advantages
- Double benefits: Besides wealth creation, savors can get life insurance protection by investing in endowment plans. Suppose the insured dies or becomes disabled during a policy period. In that case, some insurance clauses may trigger waiving payments in exchange for contributions made by insurance companies instead.
- Regular payouts: Unlike fixed deposit accounts, endowment policies allow regular premium payments in addition to a lump sum. Small or budget investors can benefit from the options.
- Tax benefits: Your CPF accounts allow tax-deductible money invested to accumulate wealth in endowment plans.
- Forced savings: An endowment plan is ideal for CPF investments due to its nature of long-term savings. Regular and consistent savings are the way to wealth accumulation.
- Higher return: The average interest rate of 3.5% p.a. is higher than that fixed deposits offer. Investors can use endowment policies to beat inflation and create retirement savings.
Disadvantages
- Lower returns: Returns from endowment plans are lower than other investments. Though a secure investment, investors may opt for investments with potential returns for faster wealth creation.
- Limited flexibility: Endowment plans may charge penalties or loan interests for early withdrawal or surrender, leading to investment loss.
So, Which is Better?
When it comes to choosing between a fixed deposit and an endowment plan, it’s important to consider your financial goals and risk tolerance.
Choose a fixed deposit if:
- You need a place to put aside your money for several months before use and think a savings account offers little return. A fixed deposit is a suitable place for this purpose.
- You are risk-averse and need a secure place for preserving wealth. A fixed deposit has ideal for low-risk investors.
Choose an endowment plan if:
- You are committed to goal-oriented long-term wealth. Through regular and consistent contributions, you can create nest eggs for retirement, education, or other goal-setting purposes.
- You diversify your investment risks. Including one or more endowment plans in your investment portfolio can lessen concentrating risks in stocks and real estate.
FAQs
1. What is a better alternative than a fixed deposit?
Like fixed deposits, another popular option is a cash management account, an investment portfolio combining equities, ETFs, and REITs. At any time, investors can benefit from cash deposits and withdrawals from the highly liquid account.
Furthermore, the cash management account also offers a modest interest rate from 3% to 3.5%, resembling a fixed deposit. However, investors should consult financial advisors about the risks of investing in this type of account, like principal safety.
2. What is the difference between a fixed deposit and a traditional insurance plan?
A fixed deposit is a money account with a fixed tenure you agree to fund from 3 to 36 months. At a tenure end, you get back the fund with deposit interests. A bank or finance company guarantees the money and repays investors the principal with interest.
A traditional insurance plan, offered by insurance companies, combines savings or investments with life and other insurance benefits, such as an endowment plan, a whole life, or a unit-linked insurance plan. Insurance plans comprise investment, guaranteed cash values, or both to meet savors’ requirements.
3. What are the differences between an endowment and an insurance savings plan?
An endowment plan usually promises a savings target besides life insurance protection, such as a guaranteed sum at a policy term like 5 to 20 years with or without a bonus(depending on plan clauses) if a policy owner commits payment terms.
A life insurance savings plan protects an insured’s life with savings or investments. A traditional life insurance plan buyer prioritizes life insurance; the savings or investment is the rest.
Final Thoughts
Fixed deposits are more liquid and secure investments with little charges but offer little returns. Endowment plans provide goal-oriented and long-term investors with higher interests but impose higher penalties on early withdrawals or surrender. Investors should examine their financial needs before choosing an appropriate investment for their conditions.
Key takeaways
- Fixed deposits are safe, liquid investments with fewer returns.
- Endowment plans offer investors guaranteed cash benefits, bonuses, and life insurance protection.
- Fixed deposits fit short-term investors requiring funds for other purposes within a short time.
- Endowment plans suit long-term investors with financial goals for wealth creation.
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