Why you should not get a Investment Linked Policy for investment reasons.
Firstly for those who have only a vague idea of what a Investment-Linked Policy (ILP) is do refer to this information sheet
For those who still have no idea or want an in depth understanding, you can study the ILP Guide
Purpose of the article is to show why you should not place priority on investment returns when purchasing Investment Linked Policy which is meant for insurance cover. (Portfolio Bonds and 101 Policies are also ILPs which give no insurance cover, as discussed HERE) Be wise not to jump into conclusions that all ILPs are bad and should never be bought. The merits of ILP for protection will be further discussed.
The problems with using ILPs with insurance cover marketed in Singapore for investment purposes are as such:
1) They are designed with high upfront charges (as compared to other investment options). We are referring to charges other than mortality and morbidity costs which is the cost of insurance cover and mostly small in amount.
The upfront charge can be as high as one year of premium. For premium of $300 a month, $3,600 can be taken away to pay commission and upfront charges. The consumer is not told directly about these charges. Here are the ways adopted to present the cash values but not these charges.
Firstly, x% of the premium is allocated for investment. This means that (100-x)% is taken away. Secondly, x% is allocated for investment, but the annual charge that is taken away to pay the distribution cost and other charges. Thirdly, the total amount allocated for investment is 100% premiums paid after a certain period, say 5 years or longer. However, the charges are deducted before the amount is invested. Additionally, there is a sales charge (usually 5%) for the buying in of funds.
2) They do not have the liquidity and flexibility of pure investment. Many companies impose a surrender penalty if the policy is terminated within a certain period, say 8 years.
Additionally, the life assured passes away when market is in recession, all the units collected over the years will be sold at a low unit price. Moreover, consumers are deterred from taking profit from a bull market that maybe is near the peak, as selling totally would come at the costs of losing the insurance cover. They are only about to transact a portion of the holdings.
3) Performance of funds available within ILPs of each insurance companies is decent. However, it will be easy to see the benefits of investing in unit trusts, where you can select from more than 400 funds from top asset management companies. There tend to be superior performance in different geographical and industry sectors for different asset management, therefore the need for selection.
One reason why many consumers might be hearing that ILPs is a good investment tool can be that tied insurance agents (belonging to Predential, AIA, Great Eastern, etc) don’t have the license to sell unit trusts directly thus they have to sell investment linked products. Test your adviser by asking the following questions. In fact, any answer other than the first, I will seriously give him/her a good lashing.
Consumers are not told and not aware that small amounts can be invested in a unit trust that offers the same potential return, but does not incur the high cost.
There exist a kind of investment-linked ‘insurance’ policy that has no such charges. Historically, they are designed over seas for tax and estate planning purposes. These ‘polices’ or ‘portfolios’ to be for accurate pays out only 101% of the value of the funds upon death. This is the only investment-linked policy you should ever get for investment purposes. Read HERE.
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