Is an Investment-link Insurance Good or Bad? A breakdown of 3 ILP misconceptions

Updated: Oct 26

It’s a vicious cycle for investment-linked policies (ILPs).


Many online articles misrepresent them and financial agents don’t want to deal with the backlash from selling them. If one shares what they know about ILPs with their friends, info likely sourced online, it only perpetuates the cycle of untruths. If you read those articles, the question of 'Are Investment link insurance good or bad?' would be rhetorical.


Nevertheless, this article is not about calling out the half-facts financial bloggers are perpetuating, but addressing three common ILP misconceptions. Neither do I aim to sell the answer to the question of whether investment-link insurance are good or bad. My goal is clear the air about ILP and if you are intrigued by what I had to say, you can always contact me to have a further chat.


Misconception #1 - ILPs are a terrible investments because of the allocation ratio


When ILPs were first introduced, they were front-end loaded. This means that only part of your premiums went toward investments (based on the allocation ratio). E.g. Only 15% of premiums is used to buy investment units in Year 1.

Front-end loaded ILPs / Image Credit: MoneySense

At first glance, this doesn't look great. The first few years look like a bias towards the insurance company (as suggested by a local blogger). In addition, you lose out on the magic of compounding interest.


Truth:

The front-end loaded ILP structure is outdated and since 2006 too! What you’ve been reading is expired news, even the 2015, 2016 articles. Most ILPs today are back-end loaded i.e. the entire premium goes into investment from the very start. The investment units are then sold off later to pay for fees and insurance charges.


Insurance companies created front-end loaded ILPs for the sake of settling your insurance expenses ASAP, that 's why they prioritise insurance fees first. However, people soon learned that their own investments returns would likely beat the crap out of their ILPs’ (magic of compounding). Furthermore, front-end loaded ILPs ended up being ‘time-bombs’.


See: How to Recognise (and Avoid!) the Ugly ILP Time Bomb


Misconception #2 - ILPs are inferior investment tools because its value relies on fund performance


Yes, your ILP’s value is dependent on your fund performance. If the funds your ILP is tagged to underperform, the value of your ILP falls as well. However, that is not a valid point to argue for ILP inferiority. To argue the contrast, if your funds perform well, your ILP value soars.

Golden Asia Growth Fund / Image Credit: Manulife

Truth:

If your ILP value falls, it’s probably because the chosen investment funds suck. The ILP is simply a wrapper around the insurance and investments plans. Don't hate the wrapper, hate the contents.


In addition, insurance companies offer free-fund switching so make use of that. However, do so with discretion. You chose that fund for a reason so any switch should be justified. If you switch the second the fund value drops a little, you could lose a lot of money. Any good investor needs to have a level of risk tolerance. Since ILPs are are long time-horizon investments, you must be willing to tahan little falls to ride out the volatilities along the way. That is basic investing.


Good ILPs wrap good insurance structures and funds together. A strong advisor must be able to explain how it all comes together nicely. If they can, you probably have a winner on your hands. It decreases the probability that your ILP value will fall.


What does your ILP look like?

Did you know?

Indian funds trailed US equities for 5 years (’11 to ‘16) and then beat the crap out of them in 2017 to the point of doubling or tripling the performance of US equities. I.e. if you had an ILP with Indian funds, you would have beaten the US market, the most efficient market in the world.


Misconception #3 - You will be burnt by the costs of your ILP because of sunk cost fallacy


The sunk cost fallacy discusses how one can be reluctant to surrender something because of how much effort has been invested into it. For an ILP, this would refer to someone being hesitant to give up their time-bomb ILP because they have paid so much in premiums.


Truth:

The sunk cost fallacy is only applicable if you believe that getting an ILP will inevitably lead you to lose money, which is untrue.


The longer you hold onto your ILP, the higher your bonuses get (depending on what is offered by the company) and the lower fees become. And if you have chosen (and managed) your funds well, your investment account value should not end up at a loss either.


I can't emphasise this enough, ILPs are investment tools for people with long investment time horizons. If you cannot afford to wait 10, 15, 20 years, don’t get involved with one. Chances are you will feel the pinch of the sunk cost along the way, but you must be willing to ride out the duration to plan maturity.


What you actually need to consider when buying an ILP

  1. The purpose of your ILP. E.g. Balanced ILPs vs investment-intensive ILPs

  2. What the most comfortable payment duration for you is

  3. Risk capacity for investment

However, none of the above are problems you have to solve on your own. It is my job as a financial advisor to address any and all concerns you have about the ILP best-suited for you.



Money Maverick

As one of the Top Financial Bloggers in Singapore (Feedspot, Withcontent.co), I would be happy to answer any emails and questions you may have, as I have been doing for my readers over the past few years - especially about Insurance and Investing, as it is my forte of personal and professional knowledge.


If you have any such questions about the articles and how it may apply to your finances, you can feel free to leave a comment, or drop a message through any preferred medium (if you prefer privacy).


Facebook: https://www.facebook.com/luke.ho.54

Whatsapp: 91769099


Do like and share my page, https://www.facebook.com/themoneymaverickofficial, if you enjoyed the article.


You can also share the articles with your loved ones in the links below.


Money Maverick is a Licensed Financial Consultant with MAS, who specializes in Investments and Critical Illness Insurance.


The views on his blog are strictly of his own opinion and have no affiliation to any of the companies he works with.


Here are some of my resources on:


1) Investing: Why you should invest aggressively NOW (and how you still can have peace of mind)


2) Insurance: The Newest, Rising Critical Illnesses in Singapore (2019)


3) Retirement and Leverage: Leveraging a Private Annuity, Pros and Cons (ft. Jamus Lim)


4) Spending and Saving: The Biggest Spending Mistakes You DIDNT Even Know you were Making (and how to avoid them)


5) Job Assessment: A Case Study on How a $6k/mth Girl makes MUCH more money than a $10k/mth Guy


6) Financial Optimisation: How I Avoid the Largest 'Fees' of All


#ilp #ilps #ilptimebomb #investmentlinkedpolicy #debunking #insurance #insurancesingapore #investing #riskmanagement #sgfinance #nowyouknow #financialplanning #moneymaverick

Money Maverick Logo_500x100.png

Money Maverick © 2019 | All Rights Reserved | Disclaimer

The views, opinion and information in all articles are those of the author. These materials do not represent or reflect the views of Manulife Financial Advisors nor is endorsed by them. Manulife Financial Advisors shall not be liable or responsible for the materials of the author. 

  • Facebook
  • Instagram
  • YouTube

Follow Us At:

  • Instagram
  • Facebook
  • YouTube