The benefits and relevance of endowment policies

Endowments have come under some scrutiny of late, with concerns regarding the flexibility of this type of savings platform, the uncertainty regarding what market conditions might look like on maturity, and what the returns will look like because of this.

As with many financial products, finding the Cinderella slipper is key. That is, fitting the right shoe on the right foot.

An endowment is a specialised solution for a very specific type of financial planning need, and it comes with a host of benefits. The trick is to pair the correct product with the correct client.

The benefits of an endowment fund

Endowment funds are ideal for clients in a higher income bracket. Those with a marginal tax rate higher than 30% will benefit from the fund’s flat rate, leading to reduced tax payable as the investment grows, and improved returns.

Another benefit is that by appointing a beneficiary, no executor fees are applicable. When the policyholder dies, the beneficiary will be paid out directly, and will not have to wait until the estate is wound up.

In terms of Section 63 of the Long-term Insurance Act, 52 of 1998, an endowment comes with full insolvency protection after three years.

An individual, or that of a business or trust, is protected from creditors after three years, as well as for five years after the endowment has been terminated, provided that the proceeds are payable to a policyholder’s spouse, children or parents.

Furthermore, should an asset have been bought with the proceeds of that endowment, this is also protected for a further period of time.

Selecting an endowment fund means that a client has access to the leading investment funds in the industry, making it easier to select the most appropriate funds and structural benefits for their needs. A layer of protection can be added through an optional investment guarantee, which will prevent losses and guarantee a specific rate of return on maturity.

Clients who are already investing in unit trusts and those who have used all their tax allowances are the kind of clients who could also benefit from an endowment. Those who recognise and are satisfied with a five-year or longer investment term horizon, who want a goal-based savings platform, and are disciplined towards that target, can really take advantage of what an endowment has to offer.

Alongside these attractive benefits, as an adviser, you can assist them in managing their portfolio to help them get the best returns. There is no doubt that an endowment policy can fill a specific gap in a client’s financial plan. What is important is for you to help your client understand the benefits and how to get the most out of it.