Investment Linked Policies (ILP)
Asked on 22 May 2020
If they are different, what are your thoughts on some of the best ILPs out there? And also, what are some of the best Insurance savings plans?
Investment linked policies and traditional endowment policies (insurance savings plans) are very different.
ILPs are invested in Mutual Funds/Unit Trusts or ETFs chosen by the investor, advised by the financial advisor, where you take all the risk of the market and funds chosen. There are no guaranteed returns and you get the full upside or downside to your portfolio.
Within the ILP universe itself there are multiple types. Those with a sum assured similar to a life policy (and further sub sets of this), and those that pay just 1% above your Net Asset Value which is pretty much no insurance and is instead a pure investment allocated product. You get access to a RSP method of investing into equity, bond, commodities, property funds.
Traditional endowment plans provide you with both guaranteed and non guaranteed bonuses paid from an insurer's participating fund which your money is invested in (but some are non participating and are fully guaranteed). You transfer all the market risk to the insurer and you receive smoothened bonuses on a conservative portfolio managed by the insurer. Most endowment plans today are also capital guaranteed when held till maturity.
Traditional endowment policies come in all shapes and sizes and are meant to be used for goals based or due date financial commitments, like providing for funding for tertiary education, or a mid term goal of a house down payment, or planning for a source of income for retirement, or leaving a source of wealth as a legacy to grandchildren, or income for charitable purposes.
The shorter your endowment policy, the lower your returns, the longer it is (25-100 years) the higher it is.
I've seen short term endowment plans giving high 1+% to low 2% p.a. And I've seen long term endowment plans give up to 4.6+% p.a.
There are no best plans, just plans that fit your goals and then shopping around for similar type plans after the goals for it is chosen.
Instead work with a financial advisor as there products aren't "off-the-shelf" products and have to come with financial advice. Understand how they pay, when they pay, and the costs and benefits that come with them.
No, an investment-linked policy is different from an insurance saving plan, otherwise known as endowment plan.
For an investment-linked policy, the premium is put in a fund that will be invested by the insurance company. You will be able to determine your allocation of asset that will maximise your long-term return. While it might have a higher rate of return, you will also have to bear the risk of the market.
Endowment policy constitutes less risk and is normally use for goal-based saving, such as university tuition fees or retirement. Unlike investment-linked policy, your money is placed in the Insurance company participating fund. Endowment policies, however, have a guaranteed component which investment linked policies do not offer.
If you have any other queries, feel free to tag us in your questions.
They are both different products. Investment-linked policies (ILP) are an investment product itself: you have an investment portfolio comprising of ILP funds. However, even within ILPS itself, there are ILPs that cater more to protection-based (insurance coverage) and there are ILPs that are purely investment-based (ie. the death benefit is minimal).
You have to be clear as to which is your preferred option. If you want to go investment-focused, you'll want to get the ILP thats of the latter nature. Reason being that not all your premiums will be invested fully from the start (there is a gradual increase) for protection-based ILPs.
Also, the ILPs are as good as the funds itself; if your ILP portfolio is invested in poor-performing funds, it'll be a disaster. You can actually find the fund performance online at the insurer's website or check with a Financial Advisor. Your Financial Advisor should be able to break down for you your portfolio and explain the nature & performance of the funds. That being said, ILPs do not have guaranteed returns (though the potential upside returns are higher).
Insurance saving plans are great if you want to opt for a way to save with some non-guaranteed interest and guaranteed bonuses alongside it. The capital is guaranteed if you hold it to the holding date (though some allow flexible withdrawal within). Do make sure you check if you are able to commit for that length of time.
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No, they are different. Let me explain.
1. Endowment Savings Plan
Generally, endowment savings plan are participating policies. As a result, your money is invested into the insurance company's participating fund. With this in mind, it will be good to understand on how a participating fund works.
For the most part, it is important to understand the investment allocation made by the participating fund. For instance, one company may place greater emphasis on equities in order to give policyholders the same rate of return as compared to another insurance company that placed greater emphasis on bonds.
As a result, most of us prefer a more conservative route since it is unnecessary to take additional risk than required for the same return (to policyholders). Furthermore, this leads to higher expenses which will indirectly affect the policyholders (explanation in my post on participating fund).
Next, we will find out how we get our cash value in return through declared bonuses. Generally, there are termed as Reversionary Bonus and Terminal Bonus.
Different insurance companies may give a different rate of bonus to their policyholders. This is usually based on the sum assured in the policy. As always, the higher the rate, the more money that you get.
Also, take note that the compounding rate may differ too.
Smoothing of Bonuses
Some of the insurance plans adopt the concept of smoothing of bonuses in order to give the same rate of returns to the policyholder.
In order for smoothing of bonuses to work, the insurance company's participating fund must have proper track records and returns over time. Otherwise, there is simply nothing much that the fund can give to its policyholder.
The best savings plan is one that meet your needs, and has proven track record to give policyholders the optimal rate of return over time.
2. Investment-Linked Policy
Generally, the premium is invested into the investment-linked funds provided by the insurance company. Unlike a participating endowment policy, you get to determine the asset allocation based on your risk appetite.
The best funds are the ones that is able to meet your investment objectives, and is able to provide a reasonable net return for the risk undertaken.
On the whole, we need to understand your objectives before we can evaluate whether these tools are the best for you.
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They are completely different types of products.
ILPs investment value is based on the price & number of units of the fund at different periods that could fluctuate based on the market. It's considered higher risk in comparison to "savings plans".
However, unlike savings plans, you're able to choose your funds which you think would give you better returns in the long term versus the savings option. Also, most ILPs are lumped together with insurance which would incur an insurance charge. Think of it as a buy term invest the rest with the premium that you put in, except that the cost of term insurance increases as you get older.
Savings plans however, are lower risk in nature and often depend on the insurer's performance. The returns usually range from between 2-4% give or take, and are meant to keep pace with inflation rather than outperform it dramatically. The premiums placed with the insurer are usually invested in lower risk products (majority fixed income) as they generally handle a large pool of money with many policy holders Known as the participating fund. Savings plans have a guaranteed & non guaranteed return portion, whereby the guaranteed pays out regardless and the non-guaranteed portion depends on the overall performance of the fund over time. It has the feature of smoothing of bonuses, such that when there are good years (fund makes excess returns) not all of it is paid out and some are kept for rainy days / bad years (fund makes losses or not as great returns).
The best plans are typically the kind that work for you. Every person has different needs at different points in life. As long as the plan pays out when you need it the most to fulfill a certain financial objective (eg. kids education, house upgrade, retirement, car, business capital), I would certainly say thats a great plan.
Personally, I love the type of savings where there is no maturity date and the cash value grows indefinitely. I can stagger and withdraw partially and fully whenever I need it, allowing me to have more options Later on. I also wont have the problem of being "forced" to withdraw my money when I may not necessarily need it at a certain point and end up potentially buying another savings later on, incuring the cost of buying a policy twice (one at the beginning, one at the maturity date).
No, they aren't.
And insurance savings plans are not saving plans, they are endowments. The terms are very different.
To answer your main question - The broad strokes for comparison across different insurers - every insurer will be able to structure endowments and ILPs in a similar fashion. You might want to focus instead on why you decide to grow your asset in that vehicle instead.
Endowments contain guarantees which ILPs do not offer. There is a bonus component that is declared yearly and cannot be revoked once declared annually. This is fundamentally different from other asset classes where supply and demand will affect the secondary market for trading assets.
ILPs differ from plain vanilla equities and mutual funds in that they;
Provide insurance cover at a scalable, efficient manner
The treatment of assets upon death is different compared to buying mutual funds or equities. It can be regarded as a death insurable payout provided steps are taken to ensure that.
These are two very fundamentally different tools and should be used whenever the situation commands it.
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