Participating Endowment or Whole Life Plans — which plan should I buy?
Insurance is a complicated topic and being spoilt for choices doesn’t help much! We, as potential policyholders, are often faced with a situation when we are required to choose one insurance plan from several available in the market. I hope the previous article which compared Participating Endowment Plans (PEPs) and Investment Linked Plans (ILPs) did offer answers to a few questions and believe that this one arms you with making a choice between PEPs and Whole Life Plans (WLPs)
In order to choose between the two plans, the first thing you need to know is what you need! The next step, which is relatively easier, is to verify if the plan satisfies the need. While you figure out what you need, let’s tackle the easier question first and understand what needs each of these plans caters to!
Whole Life Plans are aimed at providing lifelong protection for your dependents. Most WLPs in Singapore would cover you for the lifetime or at least till the age of 99 years. The benefit is primarily the death benefit and is passed on to the dependants on the death of the policyholder. The plans, with the fixed term (i.e. until the policyholder turns 99), also come with the maturity benefit provided at the end of the term. Since the plan has savings element, the plan acquires a cash surrender value after completion of 3 years of policy term.
Now that we have a basic understanding of the WLPs, let’s see how PEPs compare. The Participating Endowment Plans are savings focussed and have fixed policy term typically ranging between 10–25 years. The policy term is chosen to coincide with a milestone, say child turning 18 years and the proceeds are aimed at funding the education. Just like WLPs, Participating Endowment Plans also have death benefit and cash surrender value.
Put simply, WLPs are protection focussed and provide you with lifelong protection. PEPs are savings focussed and provide you protection for a chosen term. In terms of similarities, both the plans provide maturity benefit, death benefit and cash surrender value.
Whole Life Plans are also an effective way of passing on the legacy as on the death of the policyholder, the entire death benefit can be passed on the heirs. In most jurisdictions, a large portion of the death benefit is tax-free and hence could imply the heirs save on inheritance tax!
Okay — but what about investment returns? The comparison of two financial products can never be complete without analyzing the investment returns. PEPs, in almost all the circumstances, would have higher returns when compared with WLPs and the reason is simple. The premiums for PEPs are invested in relatively riskier assets and hence the expected returns are higher. Additionally, the protection component of PEPs is relatively smaller than the WLPs, which in turn adds to the yield.
In toto, if you need lifelong protection and intend to pass on the legacy, Whole Life Plan is what you might want to take out. For those with the aim to meet financial goals and need protection till their dependents can fend for themselves, Participating Endowment Plan would be the right choice.
Before I sign-off, I will leave you with a pro-tip. The simpler variants of Whole Life Plans are classified as Direct Purchase Insurance (DPI) and can be bought without paying any commission and hence at lower premiums!
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. The readers are also advised to consult the tax consults for any tax related queries they might have.
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.