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​​​​​​Understanding Your Endowment

5 September 2018

South African consumers have had a financially tough three years and the rest of 2018 may be even more difficult, as experts warn of rising prices, ranging from fuel to electricity.

Naturally, as times get tougher, you may end up having to consider cashing in your endowment plan to access the money, or for one of the following reasons:

  • There has been a major change in your life, such as a separation, divorce, a marriage or civil partnership
  • The plan may no longer meet your needs
  • You can no longer afford the monthly premiums

An endowment policy is essentially an insurance policy which, apart from covering the life of the insured, helps the policyholder save regularly over a specific period of time until the plan reaches maturity. An endowment policy can also pay the full sum assured if applicable to the beneficiaries, if the insured dies during the policy term.

Cashing in Your Endowment

If you’re thinking of cashing in your endowment, don't be too hasty, as it may not be in your best interests, due to the following reasons:

  • You may incur losses when you cancel a policy by allowing it to lapse or when you surrender before it reaches maturity. These losses may be due to reduction of cover and termination charges.
  • You may receive only a reduced investment value, since there may be termination charges for early withdrawals.
  • Taking out a new policy providing the same risk benefits may cost you far more. In fact, you may not be able to get a new policy when you are older and your state of health has changed for the worse.
  • If your existing policy is what is called a “robust” policy, it has a guaranteed level premium. However, such policies supply the level premium at a cost: your premiums are loaded in the early years (in other words, you pay more than you would otherwise), so you can enjoy what is effectively a discount in later years. If you cancel halfway through the policy term, you have already paid the higher premiums, but you lose the benefit of the premium remaining unchanged (and therefore relatively low compared to the actual cost of cover) in the long term.

Instead of a surrender, there may be other options to you that will better suit your needs and your current circumstances.

Consider Your Options

  • Make the policy paid-up: You can make the policy paid-up. In other words, you make no further contributions, but leave a portion of the accumulated capital invested. You will however lose your risk benefits.
  • Reduce your premium to an affordable level: Ask the life insurance company if you can reduce your premium to a more affordable level. Your accumulated capital will not reduce by as much as when making your policy fully paid-up and you will retain a portion of your risk benefits. This makes premiums more affordable in the short term.
  • Borrow from your policy: An endowment policy is an asset against which you can borrow money. You cannot borrow money from a retirement annuity or a preservation fund.
  • Partial withdrawals: If you need cash earlier than expected, you can make a partial withdrawal. However, partial withdrawals reduce the value that will be available at the end of the term and will also reduce your contractual risk cover.

Life assurance companies may lend you money in two ways: as partial withdrawals and as interest-bearing loans. Some companies use both methods. However, this will reduce your existing policy value and other benefits.

The Benefits of Keeping Your Endowment until Maturity

  • Greater tax efficiency for higher income earners (above 30% tax rate) who have exhausted their interest exemptions.
  • Beneficiary nomination can lead to potential savings on executor’s fees. Where a beneficiary has been nominated, payment of the death benefit does not depend on the winding up of the estate and beneficiaries will receive the proceeds relatively quickly.

Once your plan matures, you have the opportunity to continue with the policy and enjoy the above benefits, and the following:

  • Insolvency protection – the entire value of the endowment will be protected against creditors after three years. This protection will continue until five years after the termination of the policy.
  • Unrestricted access to the money: you can make ad hoc lump sum or regular withdrawals from the policy.
Glacier Financial Solutions (PTY)LTD is a licensed financial services provider.
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