Understanding Endowment Policies
Although endowment policies are loosely referred to as investments, endowments are actually life assurance policies where you invest your money for a minimum period of five years. An endowment policy is merely a ‘wrapper’ – a vehicle that allows you to invest into a collective investment scheme.
It is the collective investment scheme, a product that you can access directly, into which the funds are actually invested and that generates a return. The truth is that endowment policies, while providing benefits to a specific niche investor, provide an additional layer of fees and charges, and may not be appropriate options for everyone. There are many factors that would determine whether this option is appropriate for you.
Being a long-term insurance policy, an endowment must comply with the provisions of Section 54 of the Long-Term Insurance Act 52 of 1998*, which means that there are specific restrictions applicable to an endowment policy.
This includes that an endowment policy is legally required to have a minimum 5 year term and during this period, the maximum amount you can withdraw is whichever is the lesser amount between:
- Contributions during the restriction period, plus 5% compound interest.
- The market value of the investment account less fees and charges.
Endowments are policy contracts which commit consumers to a minimum investment period of 5 years after which the proceeds are tax free. Certain restrictions are in place should you need to make withdrawals during the life of the investment, which can result in high fees and penalties.
Any remaining balance (more than R2 500) must stay invested until the restriction period ends.
Furthermore, should you increase the premiums that you are contributing to an endowment policy by more than 20% compared
to the aggregate monthly or annual premiums paid during the last two premium periods, a new 5-year restriction will come into effect.
A common misconception of endowment policies is that they are tax effective investment vehicles, providing a tax-free lump sum upon maturity. While it is correct that you will receive a tax-free amount when the endowment policy matures, during the duration of the policy, it is taxed at a rate of 30% on all interest and income earned.
Click on https://www.mswsa.co.za/gettingprofessional-advice-when-saving-andinvesting/ for more information about the role and responsibilities of financial services providers.
To contact the FAIS Ombud or lodge a complaint, call 012 762 5000 or go to https://faisombud.co.za/.
- Endowment policies can be beneficial if….
you are a high net worth investor looking for an alternative to retirement annuities. Endowment policies can also be effective estate planning tools, especially where you nominate a beneficiary so that if you die, the endowment policy is transferred into your estate without having to pay Capital Gains Tax, estate duty or executor’s fees.
- Endowment policies might not be a good idea if….
amongst other factors, you do not have a sizable investment upfront or if you are likely to need your money within 5 years.
The role of a registered financial services provider, also known as a financial planner or advisor, is crucial in helping you to make an informed decision about the most suitable option.
- The role of the FAIS Ombud
In investigating complaints relating to endowment policies, the Office of the Financial Advisory and Intermediary Services (FAIS) Ombud is responsible for ensuring that financial services providers comply with the provisions of the General Code of Conduct for Authorised Financial Services Providers and Representatives.