SINGAPORE: Investment-Linked Policies (ILPs) combine insurance with investments, allowing you to grow your money while also having life coverage. However, managing these policies can be complex as your needs and the market change. As Warren Buffett famously advised, “Never invest in a business you cannot understand.” So, should you consider an ILP—and if you already have one, how should you manage it?
In a recent YouTube video from 1M65, Singaporean technopreneur and 1M65 movement founder Loo Cheng Chuan discussed ILPs with Mr Eddy Cheong, CEO of insurance provider Havend, and Mr Christopher Tan, CEO of Providend Ltd, Singapore’s first MAS-licensed, fee-only wealth advisory firm.
Mr Cheong explained that there are two types of ILPs: protection-based ILPs and investment-only ILPs. He compared an ILP to a whole life insurance plan with cash value, noting that unlike whole life plans, ILPs don’t guarantee cash value growth, as all funds go into high-risk unit trusts, leaving the policyholder to decide which funds to invest in and how much goes into bonds versus equities.
“When you go into an ILP, you need to know what you’re getting into, because there’s no guarantee in cash value,” Mr Cheong said.
He added that ILPs carry risk, as insurance charges increase over time. If the cash value doesn’t grow enough to offset these rising costs, the policy may lapse. He explained that if the cash value doesn’t grow well and the cost increases enough to empty it out, the policy technically becomes null.
Mr Cheong also noted that while the insurance company often guarantees the sum assured if you don’t withdraw or sell any units, this guarantee no longer stands if funds are withdrawn. Also, the guarantee has a limited duration and does not offet lifelong protection.
Mr Loo pointed out that this creates a big issue for those unfamiliar with self-investing, as they may struggle to choose from 20 to 30 portfolios. Although insurance agents can provide guidance, the choices may not always be clear.
Why not ILPs?
According to Mr Tan, protection-based ILPs are similar to combining term insurance with a unit trust, which may not be ideal for those looking to invest. He argued that if investing is your main goal, it’s often better to purchase term insurance separately and opt for low-cost index funds, such as an S&P 500 ETF, or a unit trust with lower fees.
ILPs typically carry high fees, usually between 1.5% and 1.9% for equity funds, as most ILP funds are actively managed. Tan pointed out that limiting yourself to around 20 available funds within an ILP is restrictive, especially when there are cheaper and more flexible investment options available elsewhere.
For investment ILP, Mr Cheong explained that it generally offers minimal protection—often as low as 1%. This means that in a death claim, the policy only guarantees your account’s cash value plus an additional 1%.
For instance, you started with S$110,000, and then at the point of your demise, your account value is S$100,000. So your family will get S$101,000—just 1% more.
The policy’s main purpose is investment, not extensive coverage. While you can increase the protection amount, Mr Cheong noted that this would raise costs, reducing the funds available for investment, making the policy less effective for those who need substantial insurance coverage.
“So if you want to invest, you should just go invest in something else,” Mr Cheong said. “This is an investment ILP and is not meant to provide you with massive coverage. The 1% is just to meet the regulatory requirement.”
When Mr Loo asked Mr Tan if there was ever a case where an investment ILP was worth it, Mr Tan replied, “I really think there is no place for ILP because I feel that there are other ways of doing it.”
He added, “After considering even all the bonus units and all that, to us, it doesn’t make sense. It’s not just from a cost standpoint; even from an investment standpoint, even from an investment execution standpoint, it doesn’t make sense because when you buy investments, you want it to be on a platform where you can frequently rebalance—sell some, buy some—to rebalance…There are just too many restrictions.”
Mr Cheong added that Havend doesn’t recommend ILPs due to their lock-in periods, which can range from 5 to 15 years. If you surrender within this period, you face penalties. Insurance companies impose these lock-ins because they’ve already paid distribution costs upfront; if you withdraw early, they incur a loss.
But what if you already have an ILP?
What to do if you already have an ILP
If you already have an ILP, here are some practical tips from Mr Tan and Mr Cheong to help you make the most of it:
- Evaluate if you still need lifelong coverage: If you want lifelong coverage or a legacy fund, consider keeping the policy.
- Consider repurposing the policy: You can repurpose a whole-life ILP to cover specific needs, like critical illness or medical expenses, which may only require a portion of the policy’s value.
- Check your health status: If you’re in good health, you may have the option to shift to a different type of coverage. If you have health issues, consider putting the policy in paid-up mode.
- Switch to paid-up mode: If you have pre-existing conditions, you could switch to paid-up mode. This stops premium payments but keeps the policy active as a death-cover term plan.
- Pass the policy to a family member: Instead of selling it in the secondary market, consider transferring it to a family member, such as your “favourite child,” who can take over the premium payments and benefit from it later. The child will pay the remaining premiums and receive the death benefit when the time comes.
Mr Tan reassures those who already have an ILP: “It’s not all doom and gloom. You can restructure it.” /TISG
Read also: 1M65 Loo Cheng Chuan: How to profit big from HDB’s 6-9% clawback on Plus and Prime flats