If you are in the market for a product that provides insurance coverage while growing your money, you may have come across these two instruments: Investment-Linked Plans (ILPs) and endowment plans.
Both are insurance plans that come with cash values, but what are they exactly and how are they different? Which of the two is more likely to help you meet your financial goals? Read on to find out more.
What are ILPs?
ILPs are a hybrid product that comprises an investment and protection component. People who get this are usually looking to grow their wealth while ensuring that they have life insurance coverage at the same time.
With ILPs, your premiums are used to purchase investment units in funds of your choosing. A portion of this is then sold to pay for the insurance component as well as other charges such as fund management fees. ILPs have cash values which are dependent on how well your funds perform. For this reason, the cash value isn’t guaranteed.
What are endowments?
Endowment plans are a type of life insurance that has cash value. Also known as savings plans, they help you build up your savings over a specific period of time that could range from 5, 10 to 25 years for example.
It is usually seen as a disciplined way to save as it involves putting aside fixed regular premium payments over a period. These premiums are then invested into the insurers’ participating funds to accumulate cash value, which usually takes at least a few years. Returns may be guaranteed or non-guaranteed and bonuses may be available, depending on the plan. These can then be cashed out when the policy matures.
You can surrender your policy or make a partial withdrawal if you need the cash, but you may end up making a loss with early termination.
What are the differences between ILPs and endowments?
While both ILPs and endowments are insurance plans with cash values, they are quite different in how they are structured and vary in terms of returns and risk level. Here’s a quick overview of how they compare:
|Investment-Linked Plans (ILPs)||Endowment Plans|
|Cash value||Returns are non-guaranteed; depends on the performance of your investment units||Comprises guaranteed and non-guaranteed bonuses. Some plans may be capital guaranteed.|
|Risk level||Higher; you are exposed to investment risks||Low; insurer bears the risk for plans with guaranteed benefits|
|Rate of returns||Potentially higher||Low to moderate|
|Flexibility||High; choose your investments and tweak your portfolio anytime||Low; the insurer chooses what to invest in|
In a nutshell, ILPs offer potentially higher returns but they also come with more risk as returns are non-guaranteed and wholly dependent on the performance of funds you’ve invested in. Having said that, you can choose funds that have a lower risk profile.
Meanwhile, endowments are a low risk option for those who prefer a hands-free approach, but in exchange, you lose the flexibility. Your premiums and insurance coverage are fixed from the start of your policy, but with ILPs, these may be adjusted throughout your policy.
ILP vs endowment plans: which is a better option?
Both products have their pros and cons, and the better option really boils down to your financial objectives and investment preferences.
Here are some scenarios where ILPs may work better.
1. To grow your wealth
Amidst rising inflation, it’s going to take you more than ever to grow your wealth. If your objective is wealth accumulation, ILPs are generally the better choice as they give you potentially higher rates of returns, especially if you have a mid to longer investment horizon to ride out market fluctuations and manage the risks involved.
With Etiqa’s range of ILPs, you can also enjoy bonuses to boost your investments. For instance, Invest builder provides a start-up bonus1 of up to 64% of premium in your first 2 years of investment and a loyalty bonus1 of 2% p.a. of account value from policy year 11 onwards. Meanwhile, Invest plus SP gives you a power-up bonus1 of up to 1.2% of the average initial account value for the preceding 3 years before your payout date2.
2. Flexibility with your insurance coverage and investments
With endowment plans, your premium amount and level of insurance coverage is determined when your policy begins and remains that way throughout the term. But sometimes, you may want more protection when your life situation changes, such as when you gain new dependents after getting married or starting your family.
With selected ILPs, you have the flexibility of adjusting your insurance coverage throughout the policy. Some plans also offer premium holidays to protect you when life throws a curveball. For example, Invest builder comes with a Life contingency benefit that lets you make a partial withdrawal at no charge3 or take a break from paying premiums upon a covered life contingency event3. You can also add on an Extra secure waiver rider that lets you continue your policy premium-free upon diagnosis of 37 severe-stage critical illnesses.
Unlike endowments, ILPs allow you to choose your investment according to your objectives and your financial life cycle. This is suitable if you prefer to take a more active approach. With Etiqa’s ILPs, you can tweak your portfolio4 anytime to match your investment objectives with free and unlimited fund switching.
3. To diversify your investment portfolio
If your investment portfolio is dominated by low risk assets, ILPs can be used to diversify your portfolio for potentially higher returns with a choice of portfolio funds and ILP sub-funds to match your risk level.
Meanwhile, endowments are less volatile and provide stable growth with some form of guaranteed returns if the rest of your portfolio gears towards higher risk assets. Alternatively, you can still invest in ILPs but choose funds that are lower in risk.
ILPs like Invest builder and Invest plus SP make this easy with curated portfolios based on your risk tolerance, no matter if you are a low, medium or high risk taker. Etiqa’s ILPs also provide exclusive access to reputable funds that are professionally managed, including institutional funds that you typically cannot get as an individual investor.
Should you add ILPs to your portfolio?
Depending on your financial goals and investment objectives, ILPs could be a worthy addition to your portfolio. If you can accept the risks and have a longer investment horizon, ILPs have the potential to grow your wealth.
With Etiqa’s range of ILPs, this is made even easier with multiple bonuses to boost your investments, and the flexibility to adjust your investments and coverage to better meet your financial goals. If you need help adjusting your portfolio, you can also get in touch with our financial consultants for advice on how to best meet your financial goals.
1Subject to applicable terms and conditions.
2Payout date refers to every 3 completed years from the policy commencement date.
3Please refer to policy contract for terms and conditions.
4Customers are not allowed to change the underlying funds for portfolio funds.
Information is accurate as at 26 July 2022. These policies are underwritten by Etiqa Insurance Pte. Ltd. (Company Reg. No. 201331905K).
Invest builder and Invest plus SP are Investment-linked Plans (ILP) which invest in ILP sub-fund(s). Investments in these plans are subject to investment risks including the possible loss of the principal amount invested. The performance of the ILP sub-fund(s) is not guaranteed and the value of the units in the ILP sub-fund(s) and the income accruing to the units, if any, may fall or rise. Past performance is not necessarily indicative of the future performance of the ILP sub-fund(s).
A funds summary and product highlights sheet(s) relating to the ILP sub-fund(s) are available and may be obtained from us via https://www.etiqa.com.sg/portfolio-funds-and-ilp-sub-funds/. A potential investor should read the product summary, funds summary and product highlights sheet(s) before deciding whether to subscribe for units in the ILP sub-fund(s).
As buying a life insurance policy is a long-term commitment, an early termination of the policy usually involves high costs and the surrender value, if any, that is payable to you may be zero or less than the total premiums paid. You should seek advice from a financial adviser before deciding to purchase the policy. If you choose not to seek advice, you should consider if the policy is suitable for you. This content is for reference only and is not a contract of insurance. Full details of the policy terms and conditions can be found in the policy contract.
These policies are protected under the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC). Coverage for your policy is automatic and no further action is required from you. For more information on the types of benefits that are covered under the scheme as well as the limits of coverage, where applicable, please contact us or visit the Life Insurance Association (LIA) or SDIC websites (www.lia.org.sg or www.sdic.org.sg).
This advertisement has not been reviewed by the Monetary Authority of Singapore.