10 June 2019
When making a decision like this, it helps to review the reason why you set up your endowment policy in the first place. If your goal was – and still is – to build wealth, for example, you need to weigh up your options and decide on the path that will enable you to build the most wealth over the long-term.
If you are considering cancelling your endowment policy and using the proceeds to pay off your bond, for instance, you need to look at the interest you are paying on your bond and compare this to the return you expect to earn on your endowment policy (which depends on where the underlying funds are invested).
This type of comparison needs to take tax liability into account, because with an endowment, the life insurance company pays income tax on your behalf, so your endowment returns are after-tax returns. If you are cashing in your endowment policy before it reaches maturity, you also need to consider any penalties that may be applicable for early termination.
The best decision here depends on your individual circumstances and it is always a good idea to enlist the help of a trusted financial adviser.
As mentioned earlier, early termination charges could apply. Different endowment products have different minimum investment terms, so you would need to check which charges apply to your specific policy. With some newer-generation Sanlam policies, for example, termination charges only apply during the first two years after inception.
Additionally, some older-generation endowment products offer risk benefits, which you would stand to lose. There are also potential guarantees to take into account. If you are due a capital back guarantee when your policy matures, for example – the less you put in, the less you get back.
You would also need to consider the tax implications. With an endowment, the life insurance company pays income tax on your behalf at 30%. This could be a tax-efficient option for you if your marginal tax rate is higher than this and you have used your tax exemptions or maximised your contributions to a tax-free savings account. In addition, once your endowment reaches maturity and you have continued it, you will not have to pay tax on any withdrawals. By cancelling your endowment before it reaches maturity, you will therefore lose out on having a highly flexible, tax efficient savings product which allows you unlimited access to money – through lump sum or regular withdrawals – that is cash-free in your hands.
Finally, without endowment premiums to pay, your disciplined approach to saving could fall away. You therefore need to consider the impact your decision will have on your long-term savings goals. For example, you could, put the amount of money that you were using for your endowment premiums into another savings vehicle.
If you can no longer afford to pay your monthly premiums, you can make your policy “paid up”. This means that you keep your endowment on Sanlam’s books, but you stop making monthly contributions. The funds that you have accumulated in your endowment product will continue to earn compound interest until it reaches the maturity date.
There may be charges applicable when you stop paying your premiums, but these tend to be lower than the cost incurred when terminating the product completely. Ultimately, the best approach is to speak to your financial adviser for personalised guidance.