The general stigma on investment linked policies are real and up till now, there's still a significant portion of the population who is unable to differentiate between a protection-based investment linked policy and an investment-based investment linked policy (also known as 101 ILPs). I'll address them as 101 ILPs in this article. If you need to differentiate the two, refer to my article here. In my view, there's a place for every solution in the market and the problem here is consumers just expect the plans to be one size fits all. In this article, I'd like to highlight the few reasons why people may have a 101 ILP plan in their wealth accumulation portfolio.

Managing Expectations

Before we start though, I'd like to address the common perspectives before it comes up. ILPs are assumed to be costly and thus unattractive to people who are seasoned investors or love to DIY. My take is, retail products are for the wider mass market. People who love to DIY or are awesome in investing themselves rightfully should not pay so much management fees because if you can't do it cheaper and better on your own you shouldn't be doing it yourself. Period.

Now, on the other hand, there's a lot of retail consumers who are great at earning money in their respective specializations like a lawyer, doctor, vet, engineer, etc... and they may not have any interest in reading financial market news or studying balance sheets. This group will outsource their wealth management needs and a 101 ILP forms part of the suite of products that caters to wealth accumulation options in the retail market.

Now let's start.

1. Ensuring people stay invested

This COVID19 situation is my first real recession since I started work. Here's the thing, everyone says they want to capture opportunities during a market downturn. When markets are up, I hear clients commenting stuff like 'I'm waiting for the next crash before I invests more...' Then the crash came and the disciplined ones took action. The larger majority however, did nothing. They just adopted a wait and see approach and now, the S&P500 has regained all the losses it had over the past 5 months. Opportunity gone. You see, when asked to make a decision when times are uncertain, there's a lot of other emotions that people overestimate their ability to control. What if I lose my job and I cannot afford to lose the money I invest? What if markets drop and never recovers? What if I need the money because my spouse got retrenched? What if...?

This is the problem with flexibility and discretionary behavior. So while there are various instruments that allow people to have flexibility in withdrawals, when to deposit, how much to deposit, etc, usually this is the root cause of people losing money and missing out on opportunities. While this isn't a common behavior within my portfolio of clients, I've known advisors with clients who pull out their investments once markets drop drastically. Once they withdraw, they realise the losses. Frankly, the drop was so temporary, is it worth the loss?

A 101 ILP carries with it a commitment period. There is surrender charges which deters rational individuals who invests with their eyes open from withdrawing prematurely. Also, usually the investment duration can be short or long. For long term investors who commit for a 20-30 year period, they will not have any decision making dilemma during each recession. They will be able to stay invested, keep investing and benefit from the after effects of market recovery.

2. Additional Bonuses

Most of these 101 ILPs give additional bonuses to help off-set the high fees. These bonuses typically are more the longer you commit. Essentially, if an investor can commit for the full duration of the 101 ILP, these bonuses are 'extra money'. Usually, if you get the insurer to do the calculation of the break-even yield for these plans after they factor in the costs and the bonuses, the break-even yield is pretty reasonable. Typically, the break-even yield refers to minimum performance required of the investment to not lose money. So whichever fund recommended by the advisor, as long as it performs better than the break-even yield, you will be profitable. So in the case where an investor purchases a 101 ILP during a market downturn, they will have additional ammunition invested in the market on top of their own invested funds. We all know that while investment returns are important, the biggest differentiating factor between a meaningful investment and a less meaningful one is the amount invested. A $100,000 investment that gains 10% will make $10,000 while a $20,000 investment that gains 10% will make $2,000.

3. Getting Access To Accredited Investor Funds

Accredited Investor funds are usually reserved for the super rich and is typically not accessible to the retail market. One way to gain access to these funds would be through instruments like 101 ILP where some companies carry these funds. The general expectation is that these funds have the potential for higher returns and more exotic fund management philosophies. Is it really so important to invest in these funds? That depends on what kind of investor you are. Most retail investors have no interest in actively managing their investments and prefer to invest in instruments that provide some form of active management on their behalf.

4. Free Fund Switch

Is this even important? I intend to buy and hold for long term. In my view, there's no such thing as an evergreen market. Market conditions change based on how the world is changing. The more predictable a market is, the less volatility it has and probably less potential significant upside also. Buying and holding one fund forever is really the lazy way to invest. It may not be an advisable way. You may make money for the first 10 years of your investment life-cycle and under perform for the next 10 years of your investment life-cycle. For instance, the US market has been soaring to unprecedented highs over the years, even now during COVID19 relative to the rest of the world. What if Donald Trump loses the election and there are new policy changes which impacts the market? Then it's possible that investors might be better off changing their portfolio allocations to cater to the changing world. 101 ILPs enable you to do it for free within their funds selection. On the other hand if you buy and sell your stocks or mutual funds, it comes at a cost. Of course whether the fees are negligible or not is debatable. Ultimately, it also depends on how frequent you make changes to your portfolio.

Summary

In short, these are the few reasons why people may have a 101 ILP in their portfolio. I'd say that the biggest reason is typically the disciplined investing behavior and how it ensures that they stay invested during market downturns. Not everyone is suitable or likes to take an active approach in investing. Hence it is a form of no-frills solution to the average retail investor.

If you are keen to find out more about 101 ILP, please speak to a trusted advisor. As it is still considered a fairly complex instrument, be sure to understand the fees and charges as well as the commitment period & penalties before you proceed. You can also drop me a message if you would like me to help you with it.

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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'.