VC Compares: Endowment Plans vs ILPs — Which Should You Get?
Endowment plans and investment-linked plans (ILPs) are among the most common insurance plans in Singapore.
While both types of plans are suitable for achieving long-term financial goals, there are distinct differences in how endowments and ILPs work.
This article will explore the key differences between endowment plans and ILPs, so you can make an informed choice when choosing between the two.
Related: How Endowment Insurance Plans Work — T&Cs You Need To Know
Endowment Plans vs ILPs — 4 Key Differences
| Endowment plans | Investment-linked plans (ILPs) |
|---|---|
| Provides guaranteed cash value, with potential for non-guaranteed bonuses and dividends | Cash value not guaranteed; policyholder assumes 100% of investing risk. |
| Primarily used for saving, with potential investment returns. | Combines investment and insurance coverage in one. |
| Offers insurance coverage with riders. | Offers riders to expand scope of coverage. |
| Potentially lower returns, lower risk | Potentially higher returns, higher risk |
| Plan terminates upon maturity | Flexibility to maintain plan beyond premium payment period |
Understanding Endowment Plans
Endowment plans (aka endowments) are a type of insurance plan that is primarily designed for savings. They are available as regular-premium plans (where premiums are paid at regular intervals, such as monthly, quarterly or annually) or as single-premium plans, where a lump-sum payment is made at the start of the plan.
Endowment plans come in two forms:
- Participating policy, which offers guaranteed returns and non-guaranteed returns bonuses and dividends.
- Non-participating policy, which furnishes a guaranteed return only, but does not entitle the policyholder to bonuses or dividends.
While the primary goal of an endowment is savings, such plans also come with a death benefit. The insurer may also offer riders for other benefits such as critical illness and personal accident.
Endowments remain in force for a stipulated duration (from 1 to 25 years) as long as premiums are paid on time. Some longer-term endowments may allow a certain amount to be withdrawn each year in the form of cashback.
When an endowment reaches the end of its tenure, the policy matures and pays out the accumulated cash value. This is made up of the guaranteed cash value, along with any non-guaranteed returns, provided you’re entitled to them. The policy then terminates, and ceases to provide insurance cover.
Should the death benefit be triggered, the endowment pays out the sum assured of the policy, and terminates thereafter.
Read Also: Participating Versus Non-participating: Find the Best Endowment Insurance Plan in Singapore for You
Understanding ILPs
As their name suggests, ILPs are a type of insurance plan that combines investment with insurance coverage.
The premiums paid into an ILP are used to buy investment units in sub-funds (such as unit trusts and ETFs). Some investment units are then sold to pay for the cost of insurance for the policyholder.
This structure allows ILPs to have certain unique features, such as premium holidays (temporarily stop paying premiums without losing coverage), and the ability to make a partial withdrawal (by selling off some investment units). As such, ILPs are often marketed as a highly flexible solution.
However, there are drawbacks too. As the policyholder gets older, the cost of insurance goes up. This means that a larger amount of investment units have to be sold in order to maintain coverage levels, leaving less to continue earning market returns.
Remember that the cash value of an ILP depends entirely on the value of the investment units it holds. Hence, during market downturns, or in old age, the cost of insurance could exceed the policy’s cash value. When this happens, a top-up of fresh funds is required to keep the policy in force. To prevent this from happening in the first place, the coverage level will have to be adjusted downwards to keep insurance costs low.
ILPs are unable to provide a guaranteed cash value because it is impossible to predict how much the investment units will be worth at any given time. This means that during a market downturn, your ILP may be worth less than the total of your premiums paid so far. Surrendering your policy at this stage will cause you to take a loss. This is further compounded if there is an early surrender penalty imposed.
Related: Common Misconceptions about Investment-Linked Insurance Policies
Endowments or ILPs, Which Should You Choose?
Choose endowments if your primary goal is to save
To put it simply, if your goal is to save up a sum of money over a predetermined period (such as, say, a downpayment for your future home), an endowment plan would be the better option.
All you have to do is to faithfully pay your premiums (for regular premium plans) until the endowment matures, at which point you will receive your guaranteed cash value, along with any bonuses or dividends you’re entitled to.
Consider ILPs if you are looking for a long-term plan
The key benefit of an ILP is flexibility, especially once you’ve built it up to a self-sustaining level. This will take time, so the sooner you start the better.
You will also need a flexible mindset, and accept that the value of your ILP will go up and down in accordance with market cycles. You should also be comfortable reducing your insurance coverage as you get older — which runs counter to conventional wisdom.
Related: Pros and Cons of Investment-Linked Plans (ILPs) & Who Should Buy It?
3 Best Endowment Plans and ILPs in the Market
Income Gro Power Saver (Endowment)
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An endowment plan made for those who prefer shorter premium payment terms, Income Gro Power Saver is a 10-year savings plan that requires premiums to be paid in just the first three years.
This means you can free up your cash flow for other needs in the remaining seven years of your plan, while continuing to enjoy insurance protection. You will be covered against death and terminal illness with a sum assured equal to 100% of premiums paid.
With its premium payment structure, this plan is well-suited to saving towards medium-term goals.
Prudential PruActive Saver III (Endowment)
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With terms of between 10 to 30 years, Prudential PruActive Saver III is one of the longest-lasting endowment plans on the market. It is recommended for those who are determined to save towards a long-term goal — and have the discipline to see it through.
This endowment comes with a capital guarantee at maturity, eliminating the risk of losses (but only if you hold the plan to completion). It comes with a death benefit equal to 105% of the premiums paid and any bonuses or 101% of the surrender value (whichever is higher).
Those seeking a no-frills, long-term savings solution might want to check this plan out. Three premium payment terms are offered: single premium, over five years, or throughout the duration of the plan.
Etiqa Invest Starter (ILP)
If you’re keen to try investing in an ILP but aren’t ready to commit a large amount of funds, Etiqa Invest Starter may be ideal for you.
This is a regular-premium ILP with entry premiums as low as S$100 per month. You can choose from four risk-diversified portfolios composed by Etiqa’s investment professionals, and can freely switch between sub-funds with no charge.
After five years, you may opt for a premium holiday, or surrender your policy without penalty.
Want more plans to choose from? Read our recommendations on the best endowment and insurance savings plans in Singapore.
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