Are Investment-linked Policies (ILP) really that bad?

STAY AWAY FROM ILP WITH A FLAGPOLE

ILP might be good for some because when it comes to investing they have no idea which stocks to pick, and not sure on stocks/ industry composition %

Even when you managed to know how to buy/sell funds at certain market time and had made profit, have you thought about cashing out to buy other asset classes? Or to buy that branded watch you have been eyeing for?

That's where the trouble comes in, your supposed to maintain it for full 10 years to avoid heavy penalties.
If you do not, good luck to you.
If you withdraw funds on 3rd year the penalty is 90% of value.
90% EVAPORATED JUST LIKE THAT
If you withdraw at 5th year, that is 50% fly away just like that no questions asked.

Also how sure are you that this 10 years will be smooth?
With so many news of retrenchment these days and if one day your retrenched your at your most vulnerable, what you need is something to cash out no questions asked & no penalties.

But this ILP brings more harm than good, when your at most vulnerable and just wanted to make withdrawal to tide through the period of unemployment, the penalties make a further and deeper shaft into your .

If you die die wanted to have a hand in insurance plans with some investment portion:
Consider life plans, you can actually take a insurance plan loan even though the interest is high, hey but at least you wont be stressed by the recurring cc bills

Also you might consider savings plan, at least you can withdraw fund without penalty just that you'll miss out on the accumulative interests

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Just note that these 2 plans have to maintain at least 3 years++ to be of any use.

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JUST NO ILP

Personally, I just use as insurance for my insurance. I am paying the minimum premiums (~1.2k a year) for the lowest coverage life plan because it has the option to increase coverage without additional underwriting. that being many years down the road, when I need to up the coverage, I can just do so without any hassle. I don't expect to make any money from it, just expect it to keep up with inflation that's all

It seems i'm a little late to the party, here's my "two-coins" from reading all the comments here

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Also i'll just use S&P500 for index reference for simplicity sake.

While striving for objectivity and fairness towards both consumers and insurance agents, it's crucial to recognize the nuanced differences in various types of ILPs (Investment-Linked Policies).

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Traditionally, the older ILPs are insurance platforms with investment components. For such platforms, over time as the client ages, the cost of insurance increases. Consequently, if clients expect a substantial sum upon maturity from the investment component, depending on the actual performance of the fund relative to the market and the associated insurance charges, the results might leave a bad taste.

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I'm not saying they are 100% of the time bad, but it is truly tough for most active managed funds to outperform the general market (S&P500 as a gauge) over a long period. From a period referencing Nov 2013 - Nov 2023 over a 10 year period (Refer to attached image)

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https://www.google.com/finance/quote/.INX:INDEX...

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https://citywire.com/selector/sector/equity-glo...

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As you can see in the 2nd link there's only a handful 19 funds out of 305, which is a little over 6% (Global Growth Equities category) that outperformed the index over a 10 year period.

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Aside from the negative comments regarding high insurance charges eating into their policy value, many others talk about high charges and poor market conditions, I don't think ILP are inherently bad products per-se, we have to look at the suitability of the product and more importantly, fund choices chosen for and by the client!

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So few questions, why are people still invested in ILPs despite a easy google search or stumbling upon a forum like this or reddit would have easily raised 1001 red flags about ILPs.

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#1 Leverage

Unfortunately, not everyone has the luxury of time and mindshare depending on their stage of life to research about investments, most of the time they rely on their agents or friends for advice hence some people may feel that they want to diversify their time and effort and delegate someone else to manage their investment for them. This is not to say they should NOT learn and do their own investment but just as a form of leveraged expertise & diversification, if a fund/company has a decent enough track record and reasonable charges, why not? (The challenge is often finding the rare few who does well in both these traits)

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#2 Platform Incentives

The insurance companies does make it attractive to investors by having bonuses, think about it as a retail investor, here's the thing, assuming you are intending to invest anyways for the next 20 years of your life be it for retirement or just purely wanting to grow your wealth against inflation, the same amount you are pouring into a index, by doing it on a platform, you get to compound your wealth faster because of the bonuses the platform gives, some goes as high as up to 200+%

It's like investing $12,000 a year and you get $24,000 extra from the insurer to boost your investment. Hence in this sense, you'll are potentialy compounding your investments at a faster rate. (Yes, of course I have not forgotten charges)

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#3 Access to funds

In my experience, I also realised that certain platforms does gives you access to funds otherwise unavailable or hard to access for retail clients, these are funds that can range from funds that are avaliable to private banks or accredited investor funds, with potential returns of more than 10-12% returns after fees from the fund alone itself.

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I've taken the liberty to find some funds that in my own humble opinion has matched or performed superior (10-15%) to the index over a 10-year period:

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https://doc.morningstar.com/document/079763d4fc...

https://doc.morningstar.com/document/1c46780ea9...

https://doc.morningstar.com/document/eccda12f89...

https://api.fundinfo.com/document/1d9334c1c6ac2...

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Then shave off a 1.5% management fee and each of them should still land you in the average 8-10% target for longer term investments. Now then comes the kicker, the insurance platform that provides you the accessiblity to these funds and ability to leverage on the company's investment team or your individual agent's expertise to manage your investment portfolio, there are fees and charges of the ILP.

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Poor fund choice, lack of investment knowledge and high platform fees are often the cause of the bad experience with ILPs. However that being said, over the past 1 year, there are platforms which have changed the charge and fee structure for the newer ILPs, for example instead of charging a 2.5% fee on your policy value, there are platforms where their fees are charges are fixed based the amount of premium invested, for example 2.5% of annualised commitment premiums.

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What this actually means for investors is that your returns & bonuses given by the platform are not being charged, you are charged solely on the amount you've decided to invest, what this means in the long run for investors against traditional investment platforms by insurers or banks is that, take for example in the 20-year horizon where you aim to accumulate your $1,000,000 retirement pot of gold.

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The fee difference here is $25,000 (2.5% of $1mil) vs 2.5% of annualised premium, assuming $18,000 a year, that is a fee of $450 for every $18,000 invested.

Of course, comparing the fee, it is still steep compared to generally index ETFs with some as low as 0.03% expense ratio, it would only make sense for a client to invest in a ILP if:

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• They can give you access to funds that are not readily available on retail platforms or to retail investors that has been able to consistently outperform the general market and index even after the fund management charge, in short, you are looking for something that is outperforming the general market.
• The ILP platform in which client is intending in invest has a reasonable charge structure, as of now there are only 2 financial advisory insurance company that I know of has ILP with fixed/semi fixed charge structure

That being said, the entry barrier to the financial advisory industry in Singapore is disappointingly low. It only requires 4 basic examinations for someone who have never done financial planning nor do any form of investment analysis much less invested their own money to start selling investments to the general populace.

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Also I've read most of the comments and some of the policies shared by the other Seedly contributors such as @Lee Chun Leong & @I.L.'s (HSBC Life Pulsar) it is not surprisingly of the results.

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(HSBC Life Pulsar)

https://www.comparefirst.sg/wap/prodSummaryPdf/...

(Page 7-8/22)

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Account Maintenance Fee: 4%

Policy Maintenance Fee: 0.5%

Investmetn Management Fee: 1.5%

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You would need a fund that minimally gives you 16% returns to begin with if you choose to onboard this ILP (HSBC Life Pulsar) to give you minimally decent returns, just running some simple numbers here for simplicity sake.

15% - 1.5% fund charge = 14.5%

14.5% - 6% = 8.5%

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Good fund, less than ideal platform, in which case you are better off investing in a S&P500 index, achieving the same return anyways.

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So back to our question, "Are Investment-linked Policies (ILP) really that bad?"

There are about more than 20 over insurance companies in Singapore and a handful of financial advisory firm, while not all 100% investment-linked policies have staggering fee structure and obscene fund choices, it is definitely a challenge to sieve out out the good investment-linked policies that can provide decent fund choice with superior returns with decent fee structure. It can be inherently and understandably harder to sieve these out if you are working with a insurance agent from one company as that was my experience with my friends in the industry.

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I hope this does clarify certain ideas about ILPs and my intention for this post to open up more diverse discussion and hopefully educational instead of a often one-sided engagement.

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Coin toss

Yes, do not get it.