I decided to write this article after interacting with a number of consumers who hold investment type Investment Linked Policies (ILPs). Depending on how they were presented the policies, I realised there is a knowledge gap in the understanding of this instrument due to its complex nature.

In this article, I wish to highlight some of the things people should be aware of when utilizing the flexibility feature of these investment type ILPs and also highlight why there's a place for such instruments in the market when implemented properly.

What is the flexibility feature in Investment ILPs?

For starters, I am not going to list any specific insurer or product. So, in view of this, I'm talking about common flexibility features found in certain Investment ILPs (usually similar structured ILPs have similar features).

When I refer to flexibility features, it's usually referring to the following:

• option to reduce premium halfway through the premium term

• taking a premium holiday (stopping premiums for a while or for good)

• withdrawing funds during the premium term

The functional purpose of These features

Flexibility features exists within ILPs in order to offer some form of liquidity in view of unforeseen emergencies. The only other reason some people may withdraw their investments or profits is to redirect funds to better investments they come across later in life. In other words, all Investment Linked Policies are not designed with the intention that clients withdraw their funds as and when they like and stop investing before the end of their premium payment term. However, because investment horizons are long, there might be unforeseen situations that crop up later on in life that may require people to utilize these features. Even so, these features are designed in a way it should be a last resort not the first consideration.

3 key considerations

Charges are usually based on the initial premiums selected.

Often when a plan which is highly flexible is presented to a consumer, the consumer may misinterpret the benefits of the solution and over commit a higher initial premium. For most investment ILPs, there will be components of charges that are based on the initial premium selected.

In other words, consumers may understand the flexibility features correctly like:

• being able to withdraw money from the plan after a certain period

• being able to reduce or increase their premiums during the policy term (sometimes after a certain period for premium reductions)

• being able to stop putting in funds should they not want to after a certain period

• being able to take a break from paying premiums for a certain duration after paying premiums for a certain period

However, they may not understand the implications of making the decision unnecessarily.

If policy charges are based on initial premiums, then it simply means that the funds that is left inside the plan would be charged more than initially intended if future premiums are reduced or stopped. As mentioned, the design of such solutions isn't to offer undue flexibility but to give clients some breathing space if life throws them a curveball. It is also designed to encourage clients to resume their premiums at what was initially planned when they can.

If you are wondering why invest in ILPs with these flexibility conditions? Read: 4 Reasons Why You May Consider An Investment ILP In Your Portfolio

Breakeven figures are usually calculated based on full contribution throughout policy term with NO withdrawals

Insurers usually provide us with the breakeven yield if clients invest throughout the policy term. This is because investment ILPs tend to be structured in a fairly complicated manner and the calculations may be complex for consumers. Hence, the breakeven yield factors in all the charges, bonuses and premiums throughout the duration and these figures provided by insurers have to be accurate as financial services is highly regulated.

Some of these investment ILPs have pretty competitive breakeven yields. Sometimes, they may even beat charges from more flexible instruments like standard unit trusts investments with ongoing charges if the investment horizon is long term.

Now, if a consumer invests based on these attractive breakeven yields but intends to utilize all the flexibility features way before the premium term is completed, the assumption for such competitive breakeven yields no longer holds true. In fact, the breakeven snowballs higher and this might potentially cause the market to label investment ILPs as bad. In reality, it's just a misuse of the features and a poor understanding of the solution.

Investment ILPs benefit consumers the most if they hold their investment longer than their investment period

Another lesser known fact is that consumers benefit from investments the most if they delay withdrawing their investments even after the premium payment term. This is because charges drop once premium term completes and if consumers can delay withdrawing their funds, they essentially get to compound their funds longer with low charges. Many times, these plans also give ongoing loyalty bonuses which means you get more money the longer you avoid withdrawing the funds. Often, consumers care a lot about when the premium term ends because they are focused on when they can withdraw their money. There this saying, "just because you can, doesn't mean you should."

Withdraw only when you need to utilize the funds for the purpose you invested, not because there's no penalties to withdraw.

The logical question to ask

In view that sometimes the flexibility feature gets abused and presented too attractively to consumers, we need to ask logical questions to assess if the advice given to us make sense.

For example, if you are floated an idea to invest for a short duration (eg 10 years) but are buying a solution with a long premium paying term (30 years) and thereafter told to continue the premiums by withdrawing your investments to fund the plan...

You need to ask why not invest with a shorter duration in the first place or spread the budget across the entire premium term?

Usually once the premium term ends, you have full flexibility over all the funds invested and there's no clause within the investment that compels you to stop compounding your money just because the premium term ends.

Obviously, there are sound reasons why people invest for a longer duration over a shorter duration but this is usually a discussion based on intention of the consumer. It won't be discussed in this article.

Why are ILPs designed to be a sustained commitment?

One of the biggest issues with financial management among people is the ability to manage their emotions. Emotional management entails not only the fear when investments go down, but also the discipline to take action and sustain action during good times.

You only build wealth when you accumulate your small investment contributions over time. If you can only set aside $500 a month, you won't be rich tomorrow or next year. But if you set aside $500/month for 20 or 30 years, you'll definitely have more wealth. If your money beats inflation and grows at a competitive rate, you will have even more spending power 20 to 30 years later. We all know this.

However, we over estimate our abilities to govern our own money. This is true for most people. When we have too much money in the bank, we might just spend it on an expensive item which just happens to appeal to us at that moment. I witness this first hand because I recently did an experiment with my mom. I gave her a full year of allowance at the start of the year instead of monthly allowance last year. She bought an iPhone which she has been delaying to buy just because she had an influx of cash coming in at that moment. On a normal day, she's a very thrifty woman.

During the circuit breaker, I've also seen clients request to stop their regular flexible investments in unit trusts platforms but continued paying their regular insurance premiums with no questions asked. It's all about conditioning. When you know you have to contribute and there are penalties in place if you don't, you stay the course and get rewarded in the future when you really need the funds.

Summary

Simply put, the flexibility features in investment ILPs are useful to offer breathing space when we need it or if we want to withdraw our funds subsequently to put into a better mouse trap. However, what appears to be cost free isn't exactly cost free. This is what a consumer needs to understand when reading this article.

After reading this article, you may have some questions or may want to get a review of your existing investment ILP. You can reach me by dropping me a message.

Be sure to share the article if you feel this information is helpful. You will enable a lot more people to learn about investments.

About Janice I specialize in portfolio optimization (ensuring you get maximum value for every dollar you put in) and retirement planning. Clients look for me primarily to outsource their retirement planning needs so that they can focus on other aspects of life that interests them. Many of whom are very good in earning their incomes in their respective professions and wish to ensure their monies continue to work harder while they focus on what they are good at. Refer to client testimonials here.

I've helped many clients who are referred to me reduce the costs they are paying for their insurance or help provide solutions when they deem they are stuck with huge commitments bought when they were younger but unsuitable for their present life stages. You can reach me at 94313076 or my social media accounts on Facebook and Instagram.

Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.