Should I Fund My Endowment Plan Regularly Over 5 to 20 Years or Pay in One Lump Sum Single Premium?

Should I Fund My Endowment Plan Regularly Over 5 to 20 Years or Pay in One Lump Sum Single Premium?
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Last Updated on by Tree of Wealth

This question will depend largely on what you want out of your endowment plan and on your budget. Paying it through 5/10/15 years has its pros and cons and so does paying it in one lump sum.

Putting One Lump Sum into Your Endowment Plan

Putting a lump sum into your endowment plan is a great way to get compound interest. If you are looking to expand your funds and have the budget to invest a lump sum, this is probably the best option for you to take. Because, this will give you much more time to compound your money. It also eliminates much of the risk that is involved in endowment plans.

However, this option does come with a disadvantage. An endowment is a long term investment, so if you put in a lump sum right away and need to terminate the policy, you’ll be subjected to expensive fees and the surrender value payable if you have any, will be far less compared to the premiums you have already paid. With this mind, if you have the means and can commit to the policy, doing a lump sum is an excellent option.

Paying Over 5/10/15/20 Years

Paying the endowment over 5/10/15 years offers much more flexibility and it is also easier on the wallet. The main purpose for this option is to split up your savings into tranches. This is so you will have money for certain objectives or milestones, such as: getting a house, paying for your child’s education, or even retirement. It is also much more affordable, as you can split the premium over a long period of time, at the cost of less compounded interest.

For example, if your annual fee totals to $10,000 for a five year plan. You can effectively slice it in half by moving up to a ten year plan or even cut it down even further by doing a fifteen year plan. This makes it a lot easier on your wallet if you’re confident you can maintain your income that long.

This plan does carry more risk compared to simply paying a lump sum because you’ll be paying over a decade. However, the liquidity risk is not as bad compared to if you did a large lump sum. This is because it is the same as your upfront payment.

Which Works Best for You?

 In order to figure out what option will work best, you will need to take a look at your budget, cash flow, and the policies available.

The Type of Policies

Before you choose a policy, it is important to shop around and see what is available to you. Every policy is going to be different and some will work better for you than others. For example, if you are looking to do a lump sum, it is a good idea to find a plan that offers at least a guaranteed 80% capital from the first day.

If you want to find a policy that allows a 5/10/15 year payment plan then make sure to find a policy that can maximize your compound interest, as it will already be lowered compared to going for a lump sum from day one.

Budget

 Before you go out and get an endowment policy, you need to take a good hard look at your budget and cash flow. Can you afford to drop a lump sum? Are you confident that you will have your job for the next fifteen years? How stable is your income? This is where much of the risk comes from, when it comes down to paying over a decade for an endowment policy. Things may be working out right now but you never know if you will still have your job five to ten years from now.

With a lump sum, you eliminate much of this risk but it is not cheap. So, yes. It is much more affordable to split up the premium and it can help you save a good amount of cash that can be used later on but just make sure you will be able to keep the bills paid over that long period of time.

With that said, both options are great and will allow you to grow your money and use it for the important milestones in your life and one option is not better than the other. It just depends on your income, budget, and how much you want to grow your money through compound interest. So, it pays to take a look at your assets and income and figure out what will work best financially for you. Just make sure to take your time and look at the various policies available to you, as they are not made equally.

All savings plans have their own advantages and disadvantages. We recommend that all individuals choose their savings plans keeping in mind their objectives and liquidity needs to ensure they get the best possible value.

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