What are Investment-Linked Policy (ILP)?

A Thorough Comparison & Analysis

One-Stop Financial Website Icon (Investment-Linked Policy ILP)

Investment-Linked Insurance Policies (ILP) are policies that have life insurance coverage and investment components.

Investment-Linked Insurance Policies (ILP) provide Death, Total Permanent Disability (TPD) life insurance coverage. Depending on the policy, Death or TPD benefit may be the higher of the sum assured or the value of the units in the sub-fund at that time or some combination of the two.

These units’ value depends on their price, which depends on the performance of the sub-fund. This is why ILP do not normally have guaranteed cash values.

Table of Contents

Is Investment-Linked Policy (ILP) same as Endowment Savings Plan?

The answer is No!

Investment-Linked Policy (ILP) is not the same as Savings plan, but yet, they are similar in some aspects.

Before you think about getting either an Investment-Linked Policy (ILP) or Savings Plan, perhaps it is best to first understand what an Endowment Savings Plan actually is.

One-Stop Financial Types of Saving Plan in market

Is Investment-Linked Policy (ILP) same as Unit Trust (UTs)?

The answer is No!

The difference between Investment-Linked Policy and Unit Trust (UTs) is that ILP combines life insurance coverage and investment components while Unit Trust (UTs) is a pure investment instrument. Your premiums are used to pay for units in sub-funds of your choice, and some of the units are then sold to pay for insurance and other charges.

You may want to consider Unit Trust (UTs) if your primary objective is an investment. Sometimes you may also be offering the ILP sub-fund you are involved in as a Unit Trust (UTs).

One-Stop Financial Unit Trust UTs VS Investment-Linked Policy ILP

2 ways to fund for Investment-Linked Policy (ILP)

Before we start, you need to understand that you can either fund an Investment-Linked Policy by either Single Premium or Regular Premium

Single-Premium ILP

The lump-sum premium will be used to buy units in a sub-fund.

Most Single Premium ILP offer lower insurance coverage than Regular premium ILP.

Regular-Premium ILP

Premiums will be paid regularly on a Monthly, Quarterly, Half-Yearly or Yearly basis.

You may be able to adjust the amount of insurance coverage you need with regular premium ILP.

What are the advantage of Investment-Linked Policy (ILP)?

An ILP may give you higher returns than other policy types, such as endowments plans.

You’ve probably noticed that an ILP offers higher projected returns compared to other insurance policies. (Most likely, you’ve heard of it from your insurance agent.) It’s not hyperbole or some sort of marketing tactic; ILP can really give you more bang for your buck.

Based on the market conditions, the fund’s performance and the time you intend to redeem your units, you the end up receiving a greater payout than an endowment savings plan which in force for the same time span.

This doesn’t automatically make it better just because an ILP gives you higher returns than other plans. In an economic downturn, an ILP showing a higher rate of return on paper may barely break even.

ILP allows you to choose from a wide variety of investment-linked funds managed by professional fund managers. For example, low, medium or high risk, it is essential to choose funds that match your financial goals and risk profile.

ILP also enable you to switch from one fund to another to suit your financial situation and risk profile. Most insurers offer a limited number of free switches and subsequently charge a nominal fee per switch.

An ILP allows you to modify your insurance coverage. Nevertheless, it may require medical underwriting to increase your protection.

Of the units you purchased via your premiums, some of them are sold for insurance charges. Thus, higher insurance coverage means setting aside more units to cover the higher insurance costs instead of buying into investments.

This also means, of course, that fewer units will be invested in the account, which will affect your final investments returns.

One of the benefits that ILP offer is the ability to stop your premium payments temporarily which is helpful if you are transitioning between jobs or need to redirect your funds to other more urgent financial commitments. 

This is a temporary stoppage of premium payments and does not terminate your ILP.

Your ILP will still be in force with a premium holiday. This is different from other policies, which may result in your policy being terminated by stopping your premiums.

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What are the risk of Investment-Linked Policy (ILP)?

Investment returns are not guaranteed

If you buy an ILP, you will be bearing the investment risk entirely.

Funds performance is not guaranteed and unit prices will grow or fall. As such, if a fund does not perform well, it will adversely affect the portfolio and maturity values.

On top of it, investors should not depend on a fund’s past performance as an indication of its future performance.

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Units may be insufficient to pay the insurance coverage charges

As the risk of death, disability and illness increase with age generally, insurance coverage premiums usually increase as you age. The insurance coverage costs are paid through the selling of units for most regular premium ILP.

As you get older, a combination of high insurance coverage cost charges and a poorly performed fund may result in the portfolio unit’s value being insufficient to meet insurance coverage cost charges for the level of coverage the policy offers.

Review the coverage periodically, evaluate benefits and costs, and discuss whether changes are needed to ensure that the policy meets your changing needs with your insurance consultant, alternatively, you can get in touch with us to help you review your policy.

What are the types of Investment-Linked Policy (ILP) in the market?

In the below, we will understand the 2 types of Investment-Linked Policy out in the market and how it works:

High Insurance Coverage

This is the traditional and common form of ILP which has a balance of Insurance and Investment.

Similar to Term Plan / Whole-Life Plan, Investment-Linked Policies in this section allow riders to cover Early Critical Illness (ECI), Critical Illness (CI), and Terminal Illness. Coverage is also significantly higher for Death and Total Permanent Disability (TPD).

High Wealth Accumulation

This is the new and modern form of ILP which is highly used for wealth accumulation and investments.

Investment-Linked Policies in this category have a high initial capital boost in order to buffer market volatility (initial negative market conditions) or strengthen returns (initial positive market conditions). 

Those policies normally have 101% Death payout of your policy value which will be based on the investment value of your portfolio. This type of ILP does not include any Early Critical Illness (ECI), Critical Illness (CI), and Terminal Illness riders.

Moving on, we shall take a look at the
High Insurance Coverage Investment-Linked Policy first...

Investment-Linked Policy (ILP) in this category are the ones which you would have heard a number of people around regretting their purchase 

This is one of the most common Front-End Loading Whole Life Investment-Linked Plan in the market which is being promoted which is good if you want to have the best of both worlds from Insurance and Investment when you are young. 

The advantage of this plan is that you can have the flexibility of Insurance coverage such as Death, Total Permanent Disability (TPD), Early Critical Illness (ECI) and Critical Illness (CI).

Insurance costs will increase with age. As we grow older, we also increase our risk of developing illnesses. Over time, the insurance costs may no longer be covered by the units bought with your premiums. Then you may end up with little or no investment. Some then resort to reducing insurance coverage in order to maintain the investments.

Have you ever wonder how the mortality charges are being calculated in High Insurance Coverage ILP? 

Below is one of the insurer in Singapore and their mortality charges table. 

We shall take a look at how the mortality charges are being calculated and increase in cost as you age.

One-Stop Financial Investment-Linked Policy ILP - Cost of Insurance (2)
One-Stop Financial Investment-Linked Policy ILP - Cost of Insurance (4)
One-Stop Financial Investment-Linked Policy ILP - Cost of Insurance (3)
One-Stop Financial Investment-Linked Policy ILP - Cost of Insurance (1)

In the calculation below, we will be taking the age of 20, 50 and 80 for calculation with the following criteria:

     – Male Smoker (MS) [for easier reference from the first column]
     – Monthly premium payment of $200
     – $100,000 coverage from Death, Critical Illness (CI) and Early Critical Illness (ECI)

* Red will be the mortality table charges for Death, Total and Permanent Disability (TPD) and Terminal Illness (TI)

* Blue will be the mortality table charges for Critical Illness (CI)

* Purple will be the mortality table charges for Early Critical Illness (ECI)

Monthly mortality charge at age 20

Current monthly mortality charge for Death, Total and Permanent Disability (TPD) and Terminal Illness (TI):

= ($100,000/1,000) x 0.69 x 0.0834

= $5.75

 

Current monthly mortality charge for Critical Illness (CI):

= ($100,000/1,000) x 0.60 x 0.0834

= $5.00

 

Current monthly mortality charge for Early Critical Illness (ECI)

= ($100,000/1,000) x 5.50 x 0.0834

= $45.87

Total monthly mortality charge at age 20:

     = $5.75 + $5.00 + $45.87

     = $56.62

Out of a monthly premium of $200:

  • $56.62 will be going into the cost of insurance
  • $143.38‬ will be going into investment units

Monthly mortality charge at age 50

Current monthly mortality charge for Death, Total and Permanent Disability (TPD) and Terminal Illness (TI):

= ($100,000/1,000) x 3.49 x 0.0834

= $29.11

 

Current monthly mortality charge for Critical Illness (CI):

= ($100,000/1,000) x 7.33 x 0.0834

= $61.13

 

Current monthly mortality charge for Early Critical Illness (ECI)

= ($100,000/1,000) x 15.36 x 0.0834

= $128.10

Total monthly mortality charge at age 50:

     = $29.11 + $61.13 + $128.10

     = $217.34

Out of a monthly premium of $200:

  • $218.34 will be going into the cost of insurance
  • There will be a deficit of $18.34, which will be deducted from your investment units

Monthly mortality charge at age 80

Current monthly mortality charge for Death, Total and Permanent Disability (TPD) and Terminal Illness (TI):

= ($100,000/1,000) x 62.03 x 0.0834

= $517.33

 

Current monthly mortality charge for Critical Illness (CI):

= ($100,000/1,000) x 99.55 x 0.0834

= $830.25

 

Current monthly mortality charge for Early Critical Illness (ECI)

= ($100,000/1,000) x 233.22 x 0.0834

= $1,945.05

Total monthly mortality charge at age 80:

     = $517.33 + $830.25 + $1,945.05

     = $3,292.63

Out of a monthly premium of $200:

  • Cost of insurance will be an enormous amount of $3,292.63 per month
  • There will be about $3,000 being taken out from your investment portfolio every month just to sustain with the cost of insurance.

When you are out of funds from your investment portfolio, the insurer will request a top-up from you, else the policy will lapse and be terminated.

Here’s how you can work around your current High-Insurance Coverage ILP

  • By being more involved with fund-switching in the investment portion of your ILP to gain higher returns (if you’re an experienced investor).
  • Having lesser riders to your Investment-Linked Policy
    • E.g. You’re paying $200/month for premiums but if $100 goes to pay for your riders and only $100 goes into investment, your cash value will require a longer time before breaking even.
  • Have your insurance portfolio review and terminate your plan before hefty mortality charges started kicking in.
  • If you had just signed a High Insurance Coverage ILP (within the freelook period – 14 days), you should consider terminating (free-looking) your plan as soon as possible.

Do seek advice from a professional or get in touch with us, to review your needs properly before taking the next step.

How much of the front-end loading premium is used to purchase units? (For High-Insurance Coverage ILP)

The premiums are not fully used to purchase the investment units, part of the premiums will be used to pay for cost-of-insurance (mortality charges).

The ratio used is commonly referred to as the premium allocation rate and is specified in the Product Summary or Policy Contract.

One-Stop Financial Investment-Linked Policy - Cost of Insurance Units Allocation

In a front-end loading policy, most of the premiums will be charged in the early years for the expenses of the insurer, including sales and administration costs.

The remainder will buy into the units. The amount of premium used to buy units increases over time until it reaches 100%.

How about the High-Wealth Accumulation ILP?

100% of your premium is used to buy units for most top-ups, Single-Premium ILP and High-Wealth Accumulation (Back-End Loading) ILP.

Under a back-end loaded policy, 100% of premiums are used to purchase units. Distribution and administration costs are covered by back-end fees when you partially or fully surrender your plan within a certain period of time.

Although for front-end and back-end loaded ILPs the premium allocation structure differs the overall fee charges will be similar.

Units are bought at Offer Price and sold at Bid Price.

The offer price is the amount paid for buying units. For example, if the offer price is at $1 and the entire premium of $1,000 is used to buy units, 1,000 units will be purchased.

The bid price is the amount paid for selling units. Typically, there is a 5% difference between the price of bids and offer prices. For example, if the bid price is at $0.95, 1,000 units can be cashed in for $950.

The ILP portfolio’s cash value depends on the number of units you have and the unit’s bid price.

Bid and offer prices are based on sub-fund(s) performance and change on a daily basis.

Moving on, we shall take a look at the High Wealth Accumulation Investment-Linked Policy...

High Wealth Accumulation Investment-Linked Policy (ILP) is the type which does not have any coverage value other than protection against death and terminal illness at a higher of 101% of your total basic premiums paid or portfolio value.

The advantage of this Back-End Loading plan is that 100% of your regular basic premiums paid will be put to purchase fund(s) units instead of having part of the premiums going into insurance coverage.

The advantage of this plan is that you can enjoy:

1. Flexibility in varying your regular basic premium

2. Partial withdrawal, and top up your premium at any time. Thus, you can get access to cash should the need arise.

 

Commonly, by opting for regular premium, the plan will be buying into units using the Dollar-Cost Averaging (DCA) method. This evens out market volatility so you don’t need to time your investments.

Each plan has its differences in how the bonus is given or assigned

What are the fees and charges for Investment-Linked Policy (ILP)?

One-Stop Financial Investment-Linked Policy - Fee Structure

Below are an example of the fee details which can be found in the Products Highlight Sheet (PHS) of the respective fund

One-Stop Financial Investment-Linked Policy - Fee Structure 2

What are the types of fund do Investment-Linked Policy (ILP) offer?

One-Stop Financial Investment-Linked Policy ILP - Funds Offered

Returns on investment from ILPs depend on your chosen fund’s performance. There are no guaranteed returns for investment.

If the funds perform poorly, you’ll have to bear the investment losses. In contrast, if the investments perform well, you will enjoy the full benefit from investment gains. 

It is also important to remember that a fund’s past performance is not necessarily indicative of the fund’s future performance.

Should you compare your Investment-Linked Policy?

The investment-linked policies are hand-picked due to their product features and unique selling points.

Do take note of the differences in the policies which different insurers offered

Depends on policy, features may include no partial withdrawal charges and take a premium holiday as and when necessary while your investments grow.

Customised your premium term and preferred plan currency

  • Choice of the premium term (may range between 5 and 30 years)
  • Choice of different major currencies may be offered such as SGD, AUD, GBP, USD and EUR

Having the choice of Advanced Death Benefit or Basic Death Benefit for 100% invested high wealth accumulation Investment-Linked Policy.

Such plans also offer life cover from downturns on the market. Receive the higher of either 101% of your policy value or net premiums paid during the premium term.

To build a portfolio that meets your needs and risk profile, access a suite of curated ILP subfunds. In addition, enjoy cost-savings as there is no spread of bid-offer.

You can even gain access to funds that only Accredited Investors (AI) are allowed to invest, such funds are out of reach to retail investors

– Flexibility and range of available sub-unit trust funds
– Options for removing protection coverage
– Fees and recurring charges on the main investment Linked Policy
– Available protection coverages
– Unique product features

Get your Investment-Linked Policy comparisons from the top providers in Singapore here!

Start your high wealth accumulation Investment-Linked Policy and ensuring a stable inflow of it to sustain with your lifestyle, find out which is the best suited Investment-Linked Policy (ILP) for you
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