Most of us have probably heard about ILPs and endowment plans, but what purposes do they serve, and who are they for?

Besides providing protection, insurance policies can also help to save and grow wealth. Two common insurance products in the market are investment-linked policies (ILPs) and endowment plans. These products are typically used for investment and wealth accumulation. To many, they may look like they both serve the same purpose of helping you grow wealth. But what are their actual differences, and how should you choose between the two?

How are ILPs and endowment plans different?
 

The biggest difference is the way that the premiums you pay are used. ILPs invest your money in your chosen sub-funds. Hence the term “investment-linked” for which you receive non-guaranteed returns. This means the performance of the ILP is affected by how well its various sub-funds perform. As a reward for this added risk, the returns from an ILP are potentially higher if the sub-funds perform well.

With endowment plans, the premiums go into the insurer’s participating fund. In general, endowment plans have some form of guaranteed returns, and they are less volatile and less risky, which makes them suitable for those with a conservative risk appetite. For example, if you have just a guaranteed return, then this is all you will get even if economic conditions are good and other products are doing better.

ILPs and Endowment plans both typically provide a payout upon death; many also provide coverage for terminal illness or Total Permanent Disability* (TPD).

The table below shows some of the differences between the two plans:

Here are how the two can fit different financial situations:

1. Variable versus fixed payouts

If you already have a portfolio of mostly low-risk assets, such as vanilla bonds or Singapore Savings Bonds (SSBs), then ILPs provide a way to round out your portfolio. ILPs can provide higher returns if the sub-funds perform well, thus making up for the lower returns of your low-risk assets.

Conversely, if your portfolio already has higher-risk assets such as equities, then you can consider lowering your risks by adding assets such as endowment funds. This will ensure that part of your wealth is preserved and continues to grow, even during economic downturns.
 

2. Specific financial goals versus building your retirement fund

Endowment plans can be good for specific financial goals, as the returns provide relatively more stable returns than ILPs. For example, you may have a very good gauge of how much you need to make the down payment on your first home or to pay for your child’s university fees.

An endowment plan can have varying durations. You can pick a duration that matches your financial goals. For example, make the down payment on your first home in 15 years if you’re 20. This ensures you will have enough funds at the right time.

For growing your wealth in general, however, an ILP might have the potential to provide better returns, especially over a long-term period. This is because the performance of various funds tends to smooth out over a longer investment horizon.

ILPs also provide flexibility. For example, in times when you’re cash-strapped, you can take a premium holiday and use units in your funds to keep paying for protection. Some endowment products do have withdrawable bonuses that might serve the same purpose, however; so speak to a financial planner on the best options.
 

3. Varying capacity for risk

ILPs generally have higher risks. Younger investors who have a longer investment horizon may have a higher risk appetite and prefer ILPs. Growth is often a priority for younger investors who face greater inflation rate risk (ie the rising cost of goods over time, which may significantly diminish their retirement funds if they can’t keep pace).

On the other hand, older investors may want to emphasise wealth protection over growth. This may mean fewer volatile investments as they near retirement. Older investors have less time to replenish any investment losses. Endowment plans can thus provide a low-risk, stable complement to their savings.

Besides age, many other factors influence the degree of risk you should accept – these range from your number of dependants and income level to the nature of your career. Speak to a financial planner who can conduct a proper risk assessment for you and recommend the right products.

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