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Endowment policies in South Africa

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20 March 2012. An endowment policy is an investment in an insurance policy. The return on the insurance policy is usually a function of returns of underlying investments (e.g the returns are adjusted for fees, costs, guarantees, tax, penalties, etc....).

Credit risk

When purchasing an endowment policy you are taking on the credit risk of the insurer issuing the policy. Should the insurer go bankrupt, you don't have recourse to the assets backing the policy (the assets backing the policy are no longer ring-fenced in the event of liquidation).

You should be earning more than R346,000

It's a common misconception that endowment policies are tax-free.

The insurer will be paying tax during the policy term through the individual policyholder's fund at (flat rate of 30% and capital gains tax at 10%).

From a tax perspective it only makes sense to invest in an endowment policy if your marginal rate of tax is greater than 30% (or you're earning more than R346,000 per annum according to Budget 2012). You should also think about whether you've used up any tax-free income exemption.

Both the tax advantage of endowment policies for those with high marginal rates of taxation as well as the tax-free income exemption are being reviewed by government.

Investment horizon must be at least 5 years

Endowment policies have minimum terms of 5 years, with limited ability to access fund in the event of emergencies. This contrasts with collective investment schemes (unit trusts), where it's usually far easier to make withdrawals in the event of emergencies.

Estate planning

As death benefits can flow through to your nominated beneficiaries, endowment policies may be used to save executor's fees.

Advisors are conflicted

Because of the large amounts of commission typically paid on endownment policies, financial advisers may be tempted to direct investors to them.

Life & disability insurance

Some endowment policies include life, disability or other risk insurance - this makes them more difficult to analyse.

Investment guarantees

Endowment policies can have negative returns, although some endowment policies have minimum maturity amounts guaranteed by the insurer.

Exercise caution before cancelling endowments

Cancelling endowment policies involves weighing up the benefits of remaining in the endowment policy versus the benefits of taking the cancellation amount and investing elsewhere. It can be tricky to assess which option is better, and weighing it up against further options such as making the policy paid up.

Examples of endowments

Coronation Endowment Plan

Discovery Invest Endowment Plan

PSG Endowment

Stratus Endowment

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