is an endowment policy?
is a type of investment vehicle that holds an underlying
investment fund. A decision to use an endowment vehicle
should primarily be made for tax and estate planning reasons.
are some other subtleties and information to bear in mind.
An endowment is a long-term investment vehicle by nature,
with the minimum maturity period being five years. It is
possible to access some funds before the five year period
in the event of an emergency, but there are some restrictions.
It is possible to withdraw contributions plus 5% compound
interest, but there are limited withdrawal opportunities.
possible to appoint a beneficiary on an endowment policy.
In the event of the owners death, proceeds could therefore
be paid relatively quickly to a beneficiary, and no executor
fees would be paid. This is not the case with a unit trust
investment. It is also possible to cede an endowment policy
as security for a loan. Again, this option is not available
with unit trusts.
are many advantages of selecting an endowment as an investment
vehicle for financial planning including:
Endowments can reduce the tax paid on growth for wealthy
individuals: An endowment may make sense for an individual
who has a marginal tax rate of greater than 31% (previously
30%). This feature makes Endowments the best investment
vehicle for Trusts( Trusts has the tax rate possible)
No Executor Fees on death: Executors Fees are currently
around 3.99% in SA which means on a estate of R10, 000,000,
the spouse will need to pay fees of R399, 000. Another 6.84%
will be charged on income earned from the estate to the
executor. If an endowment has a nominated beneficiary, the
proceeds will pay out to the beneficiary without having
to pay executors fees.
Protection against creditors: 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.
Less admin: Tax administration is taken care of on your
behalf (the insurance company calculates, deducts and pays
the tax to SARS).
of a Discovery Endowment:
all the benefits that an endowment can offer, Discovery
can offer additional benefits to clients such as:
Upfront Boost of up to 26%: Combining the upfront boost
with a Discovery Escalator( underlying fund must be Discovery)
can effectively give a client a 100% capital guarantee with
market related returns
Zero cost investment: The As and when integrator
which can be selected instead of the upfront integrator
can refund up to 100% of a clients fees there by enhancing
Reduce effect of estate duty even further: The first R3,500,00
million of your estate will be free of estate duty at death
but the Lifebooster will boost your endowment value by up
to 15% at death which will reduce the money lost due to
estate duty even more.
at the benefits of an endowment, it is easy to see that
the target market should be the following investors:
High Net Worth individuals: Endowments will reduce the effective
tax rate paid as well as reduce the amount of money that
would be lost due to taxes at death. The ease of administration
will also give them more time to attend to other matters.
Business Owners: Because an endowment can provide one with
protection against creditors, putting some money away in
an endowment can save a client from losing everything should
their business go under. If the business is a success, the
owner can continue to grow the value of the endowment to
eliminate estate duty. Unlike a RA, a business owner can
also have access to their funds within an endowment in case
of an emergency.
Any one saving for a long term goal: An endowments liquidity
constraints and ease of admin makes it easier for clients
to reach their mid- long-term saving goals such as: planning
for children and their education, saving for a wedding or
just saving for a new house.
target clients can be identified by segmenting your Life
List as follow:
Business owners: An Endowment can be used to protect business
owners against creditors, but at the same time providing
the business owner with access to their funds.
LP owners with premiums above R3500: These people will qualify
for a free investment or the enhanced risk/return profile
by using the escalators. This would make the endowment ideal
to save for medium to long term savings goals.
LP owners over 55: These clients are most likely already
in retirement and would need to start planning around estate
duty. The estate duty benefit along with the Lifebooster
makes the Discovery Endowment and ideal vehicle for this
sort of planning. These group of clients would most likely
also have a more cautious Invest risk profile and can therefore
benefit greatly from the Escalator technology. A big part
of these clients wealth would probably be in Living
Annuities, but any discretionary money should go into endowments.