time deposit VS. savings insurance - Which One Makes Money Grow Better For You?

Are you putting your money in your savings account at the bank or investing in other places? It's a popular tradition for us Asians to save for the future, but are we putting our money in the best places for our goals and according to our risk appetites?

When it comes to saving and investing money, there are various options available in the financial market. Two popular choices in Hong Kong are time deposits and savings insurance. While they might seem similar on the surface, there are significant differences between these two financial instruments. Fixed deposits and savings insurance are both capital-preserving investment tools, but fixed deposits are more capital-preserving and have lower risks than savings insurance. Yet, the earnings are generally worse than those of savings insurance. In this blog post, we will explore the features, benefits, and differences of time deposits and savings insurance to help you make an informed decision based on your financial goals and risk tolerance.

Comparison chart: time deposits VS savings insurance

Time Deposits

A time deposit, also known as a fixed deposit, is a type of savings account offered by banks where you deposit a specific amount for a predetermined period, typically ranging from a few months to several years. Here's what you need to know about time deposits:

Fixed Returns: Time deposits offer a fixed interest rate throughout the agreed-upon term, providing predictable returns on your investment. The interest rate is typically higher than regular savings accounts due to the commitment of funds for a specific period.

Capital Preservation: Time deposits are considered low-risk investments because the principal amount you deposit is typically guaranteed by the bank. This means that even if the bank faces financial difficulties, your deposit is protected up to a certain limit as per the regulations of your jurisdiction.

Lack of Liquidity: Unlike savings accounts where you can withdraw funds at any time, time deposits have predetermined maturity dates. If you withdraw money before the agreed-upon term, you may face penalties or lose a portion of the interest earned.

Limited Flexibility: Time deposits generally offer limited options to access or manage your funds during the term. Some banks may allow early redemption for emergency situations, but this might result in reduced interest earnings.

Savings Insurance

Savings insurance, often referred to as endowment insurance or life insurance savings plans, is a type of insurance product that combines protection coverage with a savings component. Let's explore the key features of savings insurance:

Protection and Savings: Savings insurance provides a life insurance component that offers a death benefit to the beneficiaries in case of the policyholder's demise. Additionally, these plans offer a savings or investment component that accumulates a cash value over time.

Flexible Premiums: Savings insurance policies allow flexibility in premium payments, usually with the option to choose regular or lump-sum payments. Some policies may even allow adjustments to premiums over time based on your financial capacity.

Investment: After the policyholder pays the money to the insurance company, the insurance company invests the money. It then promises that the policyholder can receive the principal and interest regularly or in one lump sum within a specified period of time. This allows for the growth of the policy's cash value.

Tax Advantages: Depending on the jurisdiction, savings insurance may offer certain tax advantages. For example, some policies provide tax-deferred growth on the cash value and allow for tax-free withdrawals or loans against the policy's cash value.

Long-Term Commitment: Savings insurance policies are typically long-term commitments, often ranging from several years to decades, depending on specific plans and your saving goals. Early termination of the policy may result in financial penalties or reduced savings accumulations.

Differences between Time Deposit and Savings Insurance

Now that we have explored the key features of time deposits and savings insurance, let's highlight the differences between these two financial instruments:

Risk and Return: Time deposits are generally lower-risk investments that offer predictable returns, while savings insurance policies carry more risk due to their investment component, potentially providing higher returns in the long run.

Liquidity: Time deposits lack liquidity as funds are locked for a specified period, whereas savings insurance policies may provide greater liquidity options, such as partial withdrawals or policy loans, depending on the policy terms.

Protection Coverage: Time deposits do not typically provide any insurance coverage, whereas savings insurance policies offer life insurance protection, ensuring a death benefit for the beneficiaries.

Flexibility: Time deposits have limited flexibility regarding fund access and management compared to savings insurance policies, which often offer a range of premium payment options and investment choices.

Tax Treatment: Tax treatment varies between time deposits and savings insurance policies. Interest earned from time deposits is usually subject to income tax, whereas savings insurance may offer tax advantages on cash value growth, withdrawals, or death benefits, depending on local tax regulations.

Simple interest and compound interest rollover: According to Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.” The principal of compound interest is rolled over with the interest every year as the principal of the next year's investment. Therefore, the longer the investment period, the more obvious the effect of compound interest, and the rollover amount will be higher. The bank's regular return is calculated based on simple interest, that is, the principal plus interest will be paid directly on the maturity date, so you have to renew it yourself to enjoy the compound interest effect. However, because the funds are locked for a short period of time, the flexibility is relatively high. Most savings insurances have a term longer than one year and are rolled over with compound interests. If dividends are accumulated, it can have a snowball effect, and the returns are generally better than time deposits. You should choose between the two to see which one is more suitable for you, and you don’t have to choose one or the other. You can do both at the same time.

Conclusion

Choosing between or doing both time deposits and savings insurance depends on your financial goals, risk tolerance, and liquidity needs. Time deposits provide a safe and predictable way to earn fixed returns, while savings insurance combines savings and insurance protection, offering potential growth and coverage for your loved ones. Consider your investment horizon, liquidity requirements, and risk appetite to decide which option aligns better with your needs. It is recommended to consult with a financial advisor who can guide you based on your specific circumstances and help you make an informed decision. If you wish to know more about how much you should put towards each option and put together a holistic goal-based savings and investment plan, schedule a discovery call with me here.