Endowment plans: A better way to earn passive income?

What happened?

With interest rates on the decline, yields on fixed deposits (FDs) and Singapore T-bills have been slipping too. 

The latest 6-month T-bill yield dropped to 1.85%, while the best 6-month FD rate currently stands at 2.15% per annum. 

For those seeking a safe place to earn passive income, this has prompted a search for better alternatives.

While we previously explored options like money market funds, there’s now growing discussion in the Beansprout Telegram community about endowment plans as an option to earn a decent yield. 

Some of these endowment plans, with lock-in periods of 2 to 10 years, are offering competitive guaranteed yields.

In this article, we break down how endowment plans work, how they compare to other passive income investments, and why they might be worth a closer look in today’s environment.

What is an endowment plan?

Endowment plans are insurance-based savings policies to help you accumulate savings over a fixed period. 

They are often seen as a form of “forced savings”, where you commit to setting aside money regularly or through a lump sum, with a clear end goal in mind.

These plans come with two main components:

• A savings component, where part of your money (premium) is invested (usually in lower-risk instruments like bonds or fixed income funds) to grow over time.
   
• A protection element, which offers basic insurance coverage such as death or total permanent disability benefits during the policy term. For example, during the policy term, you might receive up to $100,000 in death coverage as long as the plan is in force. Some policies also allow you to add optional riders to enhance your protection (e.g. for critical illness or disability).

Endowment plans can be funded in two main ways: through a single premium or regular premium structure.

• Single premium:
  You make a one-time lump sum payment at the start of the policy. This amount is locked in for the entire policy term, and you’ll receive your payout, comprising guaranteed and non-guaranteed returns, only upon maturity.
• Regular premium:
  You make periodic payments (e.g. monthly or annually) throughout the policy term. While this structure helps build saving discipline, it can also be more restrictive on your monthly cash flow.

In return, the plan provides a guaranteed payout at maturity. This is known as the sum assured, or maturity value. 

Some plans offer a monthly cash payout instead, with the remaining cash value paid out at policy maturity. 

 Returns from endowment plans may come in two parts:

• Guaranteed returns: This is the portion of your payout that is assured by the insurer, as long as you hold the plan to maturity and do not surrender it early. Not all endowment plans offer guaranteed returns.
• Non-guaranteed returns: This is an additional bonus that may be paid out depending on the performance of the insurer’s underlying investments (usually referred to as the participating fund). These returns are projected but not promised, and can vary year to year.

Depending on the plan, some endowment products currently offer guaranteed yields of around 2.2% p.a., which may be higher than what you’d get from T-bills today, and comparable to fixed deposits.

Endowment plans can run for 15 to 20 years, but there are also short-term endowment plans with durations of just 2 to 5 years.

The shorter-term endowment plans may be more attractive for investors who want a balance of returns and capital preservation without tying up their money for too long.

Best short-term endowment plans in Singapore

Short-term endowment plans are gaining popularity among savers looking for guaranteed returns and capital protection, especially in a falling interest rate environment. 

These plans typically require a single upfront premium and have lock-in periods of 2 to 5 years.

Here are some of the most competitive options currently available:

Recently fully subscribed plans (currently unavailable)

These endowment tranches were available earlier but have since closed due to full subscription:

• Income Gro Capital Ease – Income Insurance
• Tiq 3-Year Endowment Plan
• Singlife Digital Saver – Singlife
• FWD Smart Save – FWD
• China Taiping i-Saver 8 – China Taiping
• Etiqa Grow Assure – Etiqa

These insurers may open up new tranches in the future, so it’s worth keeping a lookout if you’re considering similar plans.

How do endowment plans differ from T-bills and fixed deposits?

Endowment plans are often compared to T-bills and fixed deposits (FDs), especially for investors seeking low-risk, capital-protected instruments. But while they share some similarities, there are several important differences worth noting:

#1 – Potential capital guarantee

Like T-bills and fixed deposits, some endowment plans can offer capital guarantee, meaning you’ll get back your initial premium at the end of the policy term, as long as you don’t surrender the plan early.

For example, if you commit $10,000 to a 3-year endowment plan, you’ll typically receive the full principal plus any guaranteed and non-guaranteed returns upon maturity.

But do note: Not all endowment plans are capital guaranteed. Some only guarantee the sum assured at maturity, which may be lower than the total premiums you’ve paid, especially in the earlier years of the policy.

It’s also important to note that early termination could result in a lower surrender value.

#2 – Typically longer maturity than fixed deposit and T-bills

Endowment plans come with a longer maturity period, ranging from 2 to 20 years. 

Withdrawing early could incurs penalties or reduce your payout.

In contrast, T-bills mature in 6 months or 1 year, while FDs typically range from 3 to 12 months, offering more flexibility for near-term cash needs.

If you require short-term liquidity, T-bills or FDs may be more suitable. 

But if you’re looking to set aside money for a longer-term goal, such as your child’s education, an endowment plan can help prevent early withdrawals and instil saving discipline.

#3 – Bonus vs fixed return

Fixed deposits and T-bills offer a fixed interest rate upfront, so you know exactly what you’ll receive.

Only some plans provide a guaranteed return, but most endowment plans provide a potential non-guaranteed bonus based on the insurer’s investment performance. 

This bonus component means the final payout could be higher, but it’s not promised. 

In some cases, the non-guaranteed portion may not materialise, so you’ll need to assess if the guaranteed return alone meets your expectations.

Before purchasing an endowment plan, read the product benefit illustration by the provider or insurer carefully. 

This document will show you the breakdown of guaranteed versus non-guaranteed returns, total premiums paid, and the potential cash value if you exit early. 

These details can help you assess whether the plan aligns with your goals and risk appetite.

#4 – Insurance protection

One key difference: endowment plans include basic insurance coverage, typically offering a death benefit during the policy term.

T-bills and FDs do not include any protection element; they purely allow you to earn interest on your cash.

This insurance feature may be useful for those who want a light layer of protection without buying a separate policy.

#5 – Liquidity and withdrawal flexibility

Endowment plans are generally illiquid, your money is locked in until maturity, unless you surrender the policy.

Surrendering your policy may result in a payout lower than the premiums you’ve already paid up to the point of surrender. 

T-bills are tradable on the secondary market. Meanwhile, fixed deposits can be withdrawn early, but often with a forfeiture of interest earned.

If you value easier access to your funds, T-bills and FDs offer more flexibility than endowment plans.

#6 – Fees

T-bills and FDs typically have no hidden fees if held to maturity.

Endowment plans may come with distribution costs, policy fees, or surrender charges, which are baked into the product and reduce overall returns if exited early.

What would Beansprout do?

With fixed deposit and T-bill yields trending lower, it’s no surprise that more investors are exploring short-term endowment plans as an alternative to generate passive income in Singapore.

Some of these plans are now offering guaranteed returns, which are near the best fixed deposit rates currently, and higher than the latest 6-month T-bill, while still keeping your capital protected.

If you're looking for a relatively safe way to park your spare cash for a fixed period of 2 to 4 years, capital-guaranteed endowment plans could be a practical option. They’re especially useful if you have a specific savings goal in mind, such as your child’s education or a future big-ticket purchase, and you’re confident you won’t need the funds in the meantime.

That said, endowment plans are not without trade-offs. 

One of the biggest downsides is the lack of liquidity. Your money is locked in for the duration of the policy, and early surrender could result in penalties or a lower payout. 

If you’re after more liquidity or flexibility, you might want to first compare what’s available in the market. 

For example, the best high-yield savings accounts in Singapore can offer competitive returns without locking up your funds. 

Similarly, if you're looking for short-term options with higher potential yields and are comfortable taking on slightly more risk, money market funds or short-term bond funds can be a practical place to park excess cash while maintaining accessibility.

In short, endowment plans can offer a meaningful middle ground between ultra-low-risk instruments like T-bills and the higher volatility of market-based investments. 

If you value safety and predictability, but want a slightly higher yield than what’s currently on offer in the market, it could be worth a closer look.

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