Enhance Diversification and Reduce Risk With Participating Endowment Plans


Credit: Photo by Khamkéo Vilaysing.

When markets are in turmoil and every asset class seems to be experiencing some setback or other, investors may find themselves wondering what they should invest in to preserve their capital yet ensure steady growth over time.

In this article, I’ll explain how the humble participating endowment plan has been a stable source of low volatility returns, and how it has been providing potential capital growth to policyholders in the preceding decades.


What is a Participating Policy

Definition from Investopedia:

“A participating policy is an insurance contract that pays dividends to the holder. Dividends are generated from the profits of the insurance company that sold the policy and are typically paid out on an annual basis over the life of the policy.”


Is It The Same As Insurance?

Basically, if you have ever owned a whole life insurance policy, you may have received annual reversionary bonuses from a par fund and seen the value of your policy increase over the years. Such bonuses, once declared, get compounded to your policy and cannot be taken back by the company. Thus, the value only increases, it doesn’t reduce given there are no policy alterations such as partial withdrawal / reduction in sum assured / face value. In contrast, a market investment may make a gain in one year, but a loss in the following year could erode profits from the previous year.

If you find yourself asking, but why ‘insurance’? Bear in mind that endowment products use the same pooled participating funds as life insurance products, but the main purpose is capital growth and/or income. The death sum assured for such products are usually only 5-10% above the invested amount, and this guarantees the principal upon death. There is also guaranteed insurability for some endowment plans, so the health of the life assured is not an underwriting concern.

 

Why a Participating Endowment Plan?

Here are a number of reasons why one should consider an investment in an endowment plan:

  1. Usually stable, sustainable and consistent returns with very little volatility.
  2. Certain endowment plans may have capital protection features
  3. Enhance diversification & reduce portfolio risk.
  4. Professional fund management.

In addition, participating endowment plans also have these features which ensure that policyholders are the top priority:

  1. 90:10 gate - legislation ensuring 90% of par fund profits are distributed to policyholders before 10% can be distributed to shareholders, thus aligning shareholders and policyholders.
  2. Smoothing of bonuses - in years where there are surplus returns above expectation, the surplus will be paid out during leaner years, thus ensuring reversionary bonuses are consistent. Reversionary bonus is not guaranteed and may vary.
  3. Reversionary bonuses and Terminal bonuses - the surplus from participating policies are shared through additional death/surrender/maturity benefits added to the policy or through cash benefits that are paid out on a regular basis.


Suitability According to Needs

 

I personally believe that participating endowment funds should feature in almost everyone’s investment portfolio. Here are a few examples based on needs:

  1. Need help managing money - with inflation at 10-year highs, ensure wealth and savings keep pace with inflation so there is no loss of value.
  2. Wealth accumulation - use a 60:40 asset allocation where 60% is invested in higher-risked assets while 40% could be invested into a par endowment plan for enhanced diversification and reduced volatility.
  3. Retirement planning - many solutions to stretch retirement funds throughout twilight years.
  4. Legacy & estate planning - ensure legacy continues to grow for loved ones, even beyond the grave.

As with all financial planning, it is most prudent that we first have a discussion with our clients to find out their needs before devising an appropriate solution. Do reach out to one of our Excelsior Financial consultants for a discussion.


Written by:

Dax Quah

“You are your best investment, but always have a Plan B”