What is an endowment policy?

An endowment 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.

There 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.

It is possible to appoint a beneficiary on an endowment policy. In the event of the owner’s 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.

There 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: Executor’s 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 executor’s 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).

Benefits of a Discovery Endowment:

Besides 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 client’s fees there by enhancing their returns.

· 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.

Endowment target Market

Looking 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.

These 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 client’s wealth would probably be in Living Annuities, but any discretionary money should go into endowments.


Insurance Brokers and Financial Planners