Questions about Deduction of Insurance Coverage and Fees in Investment-Linked Policies (ILPs)

Hi anon,

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To answer your questions:

1. Yes, if you have a sum assured on D/TPD, CI, early CI, then units are sold from your funds to pay for cost of insurance.
2. Potentially yes in most cases, as the purchase price of the sub fund units when premiums are paid and the sale price when units are sold to cover the fees are very likely to be different due to a bid-offer spread. You can see the bid offer spread here as an example: https://pruaccess.prudential.com.sg/prulinkfund/viewFundPricing.do so you effectively are getting a sub-optimal price. If you don't have a bid offer spread, then no issue. Frankly, Unit Trusts are supposed to only have one pricing since its decided by the fund house day by day and not subject to a market auction process like stocks.
3. Yes, you have to sell more units to pay for the insurance coverage, leaving you will lesser units to get returns when markets are good.

Protection based ILPs is hardly ever a solution for protection needs. Use a term or whole life will still be better since costs are fixed. Even if budget is tight, a 5 year renewable term is still preferred than an ILP in my view.

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I've written about ILPs here: https://seedly.sg/posts/what-should-i-look-out-... so please take a look for an extended opinion from me.

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If you have further questions please reply to this answer and I'll try to answer you in my pockets of spare time.

Found this info from Credit Counselling Singapore website.

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How do ILPs work?

When you purchase an ILP, you are essentially buying units in a unit trust. Some units are then sold to pay for the insurance component as well as other charges such as fund management fees and the rest remains invested in the unit trust. ILPs have cash values which are dependent on how well your funds perform. For this reason, the cash value is not guaranteed.

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The first and most important point to note is one that is usually not appreciated by many ILP policyholders: the responsibility for deciding which unit trust, or “sub-fund’’ to invest in typically rests with the policyholder and not the insurance company.

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This is an important point to bear in mind because if the fund chosen does not perform, then it is up to the policyholder to switch out of it. Here’s why this is important.

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While you are paying the same monthly premium throughout the life of the policy, the cost of insurance typically increases year on year because as you get older the risk of death, disability and illness increases. This is even if you maintain the same coverage or sum assured.

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This means that more units may have to be sold to pay for the insurance charges, leaving fewer units to accumulate cash value under your policy.

If you have a combination of high insurance coverage and a poorly performing sub-fund, the value of your units may not be enough to pay the insurance charges. You will have to top up your premium or reduce the coverage, otherwise the policy could lapse.

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Here, it is important to note that not only are cash values not guaranteed, so is investment performance. Also, when it comes to investing in a unit trust, past performance should not be taken as a reliable indicator of how the fund might perform in the future.

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In short, although ILPs offer the possibility of high returns provided the fund chosen does well, they come with a sizeable amount of investment risk because in the worst-case scenario, the policyholder can lose the entire value of the investment.

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This means that investing in an ILP requires active monitoring on the part of the policyholder because all the investment risk is borne by the policyholder.

In other words, if your priority is protection and you are not familiar with how unit trusts work or if you are unsure as to how to select a suitable fund, then perhaps ILPs are not for you.