I decided to write on ILPs after I read somewhere online that someone gave up her endowment because she heard that ILPs are bad. This tells me that the market has a severe sense of misinformation and some people can't differentiate between an ILP and an endowment.
In this market where a large majority of people cringe at the sound of Investment Linked Policies, have you actually asked yourself why do you have such a reaction? I'd like to touch on 3 aspects in this article.
Types of Investment-Linked Policies in the market
There are mainly 2 types of Investment-Linked Policies in the market. ILP with protection element and ILP that focuses on wealth accumulation with only 101% of protection coverage. ILPs with protection element is the more common type of ILP that the market is familiar with. A lot of advisers sell this plan as a hybrid that caters for protection in terms of death and critical illness and wealth accumulation in the form of investment returns. For easy communication let's coin this type of ILP - protection ILP (not an official term). The other ILP which is gaining prominence is the wealth accumulation form of ILP which only has 101% coverage in terms of protection and focuses mainly on investment returns. Let's call this 101 ILP (also not an official term) for easy differentiation.
What's the Purpose of Investment Linked Policies?
For Protection ILPs, the main function is that it's a hybrid of protection and wealth accumulation with the main focus on protection first. One thing to note about ILPs are the charges. Usually for most ILPs there is sales charge, insurance charge, annual management fee, administration fee, fees paid to the sub-funds and redemption fees. One reason why people consider a Protection ILP is because of the hybrid nature of the plan. People with limited budget who wish to plan for death, critical illness and savings can benefit from a Protection ILP because it offers a relatively high sum assured for low premiums for death and critical illness and also provide an investment return which they can liquidate in the future for other financial goals. The flexibility component for those who are more financially tight is also very attractive because ILPs have a premium holiday feature which allows people to take a break from financing a plan. They also can keep their death and critical illness coverage as long as a minimum account value is retained in the plan after withdrawals. Most traditional plans will result in loss of coverage in the event of liquidity crunch or the need to en-cash the plan.
In terms of 101 ILP, people primarily invest in such instruments to develop a commitment to their long term goals. So while there are similar investment instruments like stocks and unit trusts around, the flexibility in withdrawal creates a huge temptation to terminate the commitment early. From experience, I've known people who have tried to use flexible instruments to accumulate wealth for long term goals like retirement however there's a tendency to fall short because of the ease of withdrawal. Usually when people require extra funds to fund certain wants, they will turn to their funds invested in liquid instruments first. When this happens, long term retirement plans might be jeopardised. 101 ILPs come with a commitment period and usually this helps to instill discipline. Apart from this, most 101 ILP also gives extra bonuses. These bonuses will become part of the capital that is invested and when the payment period ends, this funds forms part of the total account value that belongs to the investor. These extra funds tend to further enhance the power of compounding and also help to cushion the higher costs in 101 ILPs. Another perk of investing through a 101 ILP is the access to accredited investor funds. Most of us retail clients will not have the means to invest in AI funds ourselves unless we do it through such instruments.
What to look out for when you consider an ILP?
Seeing that ILP has its own place in the spectrum of financial instruments available, ever wondered why these 3 letters have such a bad name in the industry? I think it's primarily because the plan isn't the most straight forward and the adviser might not have communicated the benefits clearly. Rather than demonizing the instrument, I would say that we should consider the instrument for the features and functionality in meeting our needs. Here are some pointers on what to look out for should you wish to consider an ILP:
the returns are never guaranteed
the 4% and 8% listed on the policy illustration is projected (I personally think it's not realistic to base it on the stated figures because the projection is linear while investments are never linear)
Protection ILP cost of insurance will increase as you get older (the yearly cost of insurance may exceed the yearly premiums you pay at certain age groups so you should consider this if you intend to hold the plan for a lifetime)
101 ILP have early withdrawal charges which differs from plan to plan
if you are dollar cost averaging and staying invested for the long term, a conservative or balanced portfolio might have a longer breakeven especially after a downturn (do consider this)
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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'.
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