Participating Endowment or Investment Linked Plans — which plan is better?
I am sure the question has crossed the minds of many of us at the time of buying insurance plans. So, what is the right answer? Unfortunately, there is no right answer until the question is right. The right question is, “which plan is better for me?”. Most insurance companies would sell both Participating Endowment (more commonly known as Endowment Plans in Singapore market) and Investment Linked Plans because they both cater to different needs and risk profiles. Before we dissect the two insurance plans let’s understand how they work without getting into technical details.
Participating Endowment Plans (PEP) are more like recurring Fixed Deposits with varying investment returns. Every time the policyholder pays premiums, s/he essentially buys a Fixed Deposit with the maturity date same as the maturity date of the insurance plan. The only difference (apart from the death benefit) is that only a part of the investment returns is guaranteed. And of course, a chunk of premiums would be invested in equity.
Investment Linked Plans (ILP), on the other hand, are akin to bank deposits. The major difference being the policyholder has the liberty to decide the investment instruments, which could be money market, debt, equity or any combination of these. Similar to bank deposits, charges are deducted for the ILPs and interest is credited at regular intervals.
Now that we have a fair idea of both the plans, let’s dissect the plans on two key factors that would help you answer the big question.
Flexibility: As you might have gauged from the simplistic definitions above, ILPs clearly are very flexible. Some of the flexibilities that the products offer include
· Choice of investments: Typically, every ILP would offer an option to choose from several sub-funds. Each sub-fund would have a pre-defined mandate in terms of investment mix. For example, a given sub-fund could have the mandate to invest 20% in debt instruments and remaining in equity. The sub-funds can be switched whenever required and most insurers would offer a limited number of free switches each year
· The timing of investments: The investment, here is essentially premiums. But the ILPs come with an option to top-up the investments when you have extra money and take premium holidays when required.
· Lock-in period: Just like banks, policyholders can also withdraw money whenever you need with a minimal charge
Clearly, none of the flexibilities mentioned above are offered in Participating Endowment Plans. However, in order to be able to take advantage of the flexibilities, one needs to be financially savvy!
Risk Appetite: This essentially is a measure of how much risk the policyholder is willing to take. ILPs are generally meant for policyholders with higher risk appetite because the returns have no element of guarantee. Theoretically, the maturity value for the ILPs can be zero. PEPs, however, have both guaranteed and non-guaranteed components. The reversionary bonuses, although not guaranteed, become guaranteed once declared.
While there are several other factors that could influence the decision of choosing one over the other, the key ones are the identified above. To summarize, Investment Linked Plans make a lot of sense if you prefer flexibility, are financially savvy and are comfortable with the volatility of returns. Participating Endowment Plans are the way to go if you like stable returns and would want insurers to worry about the managing the investments!
Disclaimer: The article has been written with an aim to broadly explain an otherwise complicated and technical topic for readers with little or no insurance background. Hence, it doesn’t have finer details but is still broadly correct. Before taking out the insurance contract, the readers are advised to consult their respective financial advisers.
About the writer: Mr Sumit Ramani is the Chief Actuary of fidentiaX. He is a qualified Life actuary and a computer science engineer with over a decade of experience in (re)insurance business with focus on modelling of life and health products, peer review and business analysis.