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One of the biggest gripes I hear from consumers about their understanding of Investment Linked Policies (ILP) is that too much of their premiums goes into the protection element of the policy. They claim that ILPs are ineffective as an investment vehicle because the high cost of insurance affects the returns of their investment.
In my opinion, this understanding is outdated.
I'm not saying that such ILPs don't exist. They still do. I'm merely saying that it's just one type of ILP. Nowadays, there are other types!
If consumers are using the type of Investment Linked Policy described at the start of the article for investment, it's the wrong use of the instrument. It's akin to using a butter knife to chop up a chicken then complain the knife is blunt...
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.
This image shows the key differences at a glance:
Protection Investment Linked Policies
Hybrid (best of both world cover?)
The main purpose of such plans is for protection. This is because the design of such plans is structured in a hybrid manner where a large portion of the initial premiums is allocated to fund the cost of insurance. The remaining funds would be allocated to the investment component. Typically, the type of coverage people might go for includes death, total permanent disability and critical illness coverage (including early critical illness coverage).
Might appeal to younger age groups or low budget consumers more
Typically parents may consider this coverage for their new born as a hybrid cover not only ensures the baby has a relatively high sum assured coverage, a component of the funds allocated can also get an investment return. The cost of insurance for protection ILP policies increases with age. This also means that the cost is relatively low if the life assured is very young.
Protection ILPs may also appeal to low budget consumers due to the hybrid nature of the policy. Flexible features like premium holiday where consumers can take a break from paying premiums* is suitable for consumers with potential cash flow risk. Protection ILPs can still retain its coverage as long as there is a minimum account value within the plan even if consumers do a lump sum withdrawal half way through the policy term*.
Cost you need to take note of
Here are the common ones (but not limited to):
sales charge
insurance charge
annual management fee
administration fee
fees paid to the sub-funds
redemption fees
*subject to policy conditions
101 Investment Linked Policies
This version of ILP is the right one for investing
If your goal is to invest your money and not protection, you should be looking at this version of investment linked policies. This form of Investment focused Investment Linked Policies are nicknamed 101 ILPs within the industry. This is because the death benefit is usually only 101% of the account value or premiums paid. The cost of insurance can be potentially zero if the account value is higher than the premiums invested. There's usually no coverage like critical illness pay-out attached to such plans. In other words, it fulfills the goal of keeping the investments separate from your protection to a large degree.
Instills discipline in investing
Such plans usually have a minimum investment period. Usually, breaking the minimum investment period might come with some penalties. Even utilizing the flexibility that some plans offers like premium holiday or fund withdrawals may come with hidden costs.
That said, the minimum investment period exists primarily to ensure consumers stay invested. It is the same notion why most of us managed to amass a huge sum of money in our CPF accounts. We are forced to put in every month and we can't withdraw it freely, the money gets compounded at a higher return.
The insurer invests with you
One highlight of the 101 Investment Linked Policies is the start up bonus and loyalty bonus. Names may vary from insurer to insurer. These bonuses will become part of the capital that is invested and when the payment period ends, these funds forms part of the total account value that belongs to the consumer. The main function of this bonus mechanism is to off-set the fees in the policy. Depending on market conditions, the extra monies given at the beginning stages of the policy term can go a long way in terms of compounding, especially in a bear market.
Access to Accredited Investor Funds
How to qualify as an Accredited Investor?
For individuals to qualify to become Accredited Investors, they have to meet at least 1 of the following 3 criteria:
Income in the preceding 12 months is not less than SGD300,000 (or its equivalent in a foreign currency)
Net personal assets exceeding SGD2 million (or its equivalent in a foreign currency) in value, of which the net value of the investor's primary place of residence can only contribute up to SGD1 million
Net Financial Assets exceeding SGD1 million (or its equivalent in a foreign currency) in value
If you meet the above criteria, you can invest into Accredited Investor funds directly.
For the rest of us who don't qualify as an Accredited Investor or simply find it too troublesome to furnish the right documents, we can invest into Accredited Investor Funds through certain 101 ILPs. Basically, it's a ticket to get access to what the rich can buy.
Take note of the fees
The fee structure for 101 ILPs can be quite complex and confusing. It varies among different 101 ILPs. Typically the fees for longer premium terms are lower. A feasible way to make an informed decision on the fee structure is to ask for the breakeven yield. This way, you will get a sense of how much the investment needs to perform at before you earn your first dollar net of fees.
Pros and Cons of Each Type of ILP
Before we dive into comparing both types of ILP, I would like to first focus on the common things to look out on.
Protection based ILP or Investment based ILP are all insurance plans. There is still an insurance component, the difference lies in the degree of coverage.
The 4% and 8% illustrations on the policy illustration is a projection. It's not guaranteed.
All investment linked policies are investment instruments, hence does not guarantee the principal.
ILPs thrive on dollar cost averaging, which means a portfolio that is conservative or lower in volatility may not appreciate sufficiently to cover the cost of the policy.
The list is a good generic representation of each type of Investment Linked Policy. As the pros and cons differs from ILP to ILP even within the protection category and the 101 category, it's still advisable to use this as a generic guide and not a conclusive one.
Things to consider before taking up an Investment Linked Policy
Is your main focus protection or wealth accumulation?
Do you need a hybrid type of plan to cater to both your protection and wealth accumulation needs?
Do you have confidence in the person managing your investments or your own fund choices? - note, ultimately fund performance is determined by the fund choices
Are you interpreting the fund flexibility feature as a 'just in case' feature or something you definitely want to use? Read this article if you intend to use this feature before taking up the plan.
Do you have a strong basis why you are using this mouse trap over other mouse trap to achieve your goal?
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'.
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