Asked on 11 Aug 2018
Recently, I've been hearing about Investment-linked Policies (ILP) which don't front-end load. For example AXA Wealth Treasure or Pulsar. versus Regular Savings Plans (RSP) which you buy from banks.
I see both as similar as both are regular and long term investments. But I cant decide between the two. ILP has higher fees but has start up and loyalty bonus if you stay for long term while RSP has lower fees.
What do you guys think? I would like to invest at least $500 a month.
When you got this option... your agent most likely he/she thinks you have no time to do your own investment. To be honest, the same saying goes… you would want one financial product to do one thing well, rather than a jack-of-all-trades. Until a major technology change, there will remain a ton of middle-men: which thus drives up management fees, costs etc.
The other way is to do a RSP (or regular savings plan) investment on a monthly basis with around 1% fund mgt fees. With easy entry and exit should you decide to withdraw earlier. Most invest in index funds (eg STI ETF)
A definition: In ILPs, premiums are used to pay for units in investment–linked sub-fund(s) of your choice. Some of the units you bought are then sold to pay for insurance and other charges, while the rest remain invested.
Very often ILPs incur not only costs, but it becomes rather tricky at a later stage in life. You can head over to this post here in our Community where some users discussed the realities of the rising cost of insurance in the ILP eating up the investment value at a later stage.
Also, you can refer to this user’s blog where he/she labelled it NEVER EVER BUY AN ILP. In summary, he/she only had a return of 0.35% which is way below inflation at 2%. (in effect you lose money).
One of our big community contributor, Alan (Who also commented below), discussed the interesting trend of underinsuring. This is because they mix insurance with investment (aka whole life), endowments and ILPs. These investment products give mediocre insurance coverage.
Fun fact: ILPs became popular in the 2000s where the term insurance was not sexy enough. Agencies hence rebranded it to include investment components with coverage… there you go. ILP! It’s intention was to target the common person who didn’t want to look at growing their own money in their own ways (but most likely if you are asking this you should already be quite savvy, well done!)
Hariz Arthur Maloy
15 Aug 2018
RSP is generally better because of flexibility and no lock in. The lock in is because of high commission paid to the distibutor accelerated up front. Though held for a long term, ILP is not necessary higher cost then RSP. To some people with poor saving habit, the lock in become a nice "force saving" mechanism.
Purchasing an investment ILP is a long term commitment. There are penalties for cancelling early. However, for plans like Pulsar there is added flexibility when you can redeem units after the first 18 months and maintain the minimum in the account.
But here is what you pay for in such ILPs.
1) Management of portfolio. This has to be done by your advisor. He has to re balance your portfolio, recommend fund switches due to market outlook, provide asset allocation strategies and adjust it to your risk portfolio as you age.
2) Accessing accredited investor funds. Some platforms like AXA provide you access into funds that usually require you to be a millionaire to access. These funds are more expensive but they should outperform the market. One such example is the Fundsmith Equity fund which is managed by Terry Smith.
3) The bonus provided on ILPs are good only if you're faced with a strong bull market. Because you pay charges on that bonus. And it's pretty high for the first few years.
If the market tanks quite soon, your bonus can quickly be a burden. But if it rallies, you start out on a great foot and your investment can compound much faster than without the bonus.
When purchasing these investment ILPs, do try to achieve double digit returns, you have the access to these funds that can help you. If not it'll be too expensive to justify.
And a fun fact: The creation of such products is actually a way for you to not pay capital gains tax on your investment. Which is very high in other countries.
Because any money you redeem from the ILP is treated as an insurance pay out which is not taxed.
This is not relevant in the Singapore market because we do not have such taxes.