Should I buy an investment-linked plan given that I have plans to invest? - Seedly
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Anonymous

Asked on 27 Aug 2019

Should I buy an investment-linked plan given that I have plans to invest?

I was recently approached by a financial advisor to buy an investment-linked plan (AXA Wealth Accelerate) and was wondering if I should as my intention is to invest.

I'm a fresh grad currently working and earning about $3.5k per month.

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Jessica Ann Lee
Jessica Ann Lee
Level 5. Genius
Answered on 29 Aug 2019

Do NOT mix investment with insurance

There are so many hidden fees in Investment-linked Insurance

1) Policy fees MONTHLY (this can also be known as admin fee or xxx fee depending on the insurance company

2) The funds you are in will charge a small % fee for feeding into a larger fund that is not the insurance-linked fund

3) The real larger fund has its own usual expense ratio

4) This is the part I hate most:- the insurer takes your premiums, BUY into the fund, ensuring they earn 5% commission, then immediately take some units out, sell it at 5% lower spread, to buy the term insurance that comes with the policy.

They don't just deduct the costs needed from the policy premium, they make your policy buy units at 5% and then sell the units to get the costs.

This is just blatantly grabbing as much as they can.

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Cedric Jamie Soh
Cedric Jamie Soh, Director at Seniorcare.com.sg
Level 9. God of Wisdom
Answered on 28 Aug 2019

Short answer: no

Most funds in insurance feed into other unit trusts or mutual funds that you can get with lower expenses ratio (because insurance company stack extra fees).

You can get exposure to the SAME fund with a LOWER fee.

Having said that, you can have more choices to a wide range of funds compared to the small limited number in any insurance firm's selection.

And yes, it would be much better never to mix insurance with insurance.

PS: at the risk of annoying insurance agents, I would argue that not to buy endowment or policies with cash value too, buy enough term policies, and everything else in funds, ETF, stocks etc.

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Hi there,

I would not mix investments with insurance. Strictly keep them seperate. Make sure you have adequate coverage first prior to investing.

On the investment front, take some time to think about what is it that you want to achieve with your investments. There are a lot of asset classes out there and it will be good for you to learn about them first before planning. Sit down with an advisor that you can trust to plug any gaps in understand that you may have before you begin.

All the best!

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Victor Lye
Victor Lye, Founder & CEO at SquirrelSave
Level 5. Genius
Answered on 21 Sep 2019

You said yourself. Your intent is to invest. So an ILP is not suitable.

ILP is a bundled product comprising (i) protection (insurance) and (ii) investment components. In traditional insurance which also contain the protection and investment components, the insurance company will basically break the premium you pay into the two components. The protection component usually is small compared to the investment component. This is because insurance companies tend to ramp up the investment component. Why? One possible reason is the commission sales structure, salespeople will generally prefer higher premium products to sell - simply because of the higher commissions they will earn. In the case of traditional insurance, the insurer will have to invest the investment (or savings) component - to generate returns for the policyholder. But often the insurer can only invest mostly in conservative investments such as bonds because of the long term nature of insurance policies and capital-based regulations. This is not ideal typically for a young person who has a long-time runway.

In the case of the ILP, the insurer essentially "outsources" the investment burden to a third party manager(s). The sum assured will also depend on the performance of the investments.

The key question is whether the traditional insurance product or the ILP is suitable for a person. The clue is that most ILP holders treat it like an investment. But an ILP is an insurance product. So there is an element of mis-selling here if the client treats it as an investment. The key factor is that unlike normal investments, you cannot simply liquidate or exit the investments in an ILP - because you will also lapse the insurance component. Statistically, you are less insurable with time. This poses the dilemma of re-insurability. It is far better and more flexible to BUY TERM & INVEST THE REST. No need to bundle. You can enjoy your protection at lower charges and cost while having full flexibility to invest. ILPs came about more due to tax benefits where such premiums can be tax-deductible. In Singapore, there is no such benefit. In short, ILPs are not ideal.

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Alan Kor
Alan Kor
Level 6. Master
Answered on 28 Aug 2019

Never mix insurance with investment, period.

ILPs are rubbish products.

Avoid at all costs.

You will just be funding the agent's luxury lifestyle.

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Albert Tan
Albert Tan, Fin Lit Trainer at MoneyOwl
Level 4. Prodigy
Updated on 28 Aug 2019

Hi Anon,

Glad that you have realised the importance of starting early in investing and doing the due diligence before signing the policy. Perhaps the first question you need to ask is why are you investing. Do you have a future financial goal you are working towards? Thereafter you need to align your need (based on any shortfalls to your financial goal), your ability (as determined by various factors), and your willingness to take a risk in investing.

The thing to note on costs associated with an ILP. There are many types of costs (refer to the product brochure from page 12 to 15 :O https://myaxa-singapore.cdn.axa-contento-118412.eu/myaxa-singapore%2F739a870f-8bef-498f-bf78-bb8cb72f3ac8_axa+wealth+accelerate+ps+v2.1_clean.pdf)

Many times, the client overlooks this portion of the contract and gets persuaded by the eye-catching bonuses being paid on top of whatever returns you may get. These bonuses that are paid to you have to come from somewhere. Insurance companies are not charities. Another point often overlooked is that costs also compounds with time. As your portfolio grows, the % costs grow together.

Another point to note is on the commitment period with ILPs. Regardless of how short the Initial Contribution Period (ICP) is, how many premium holidays you can take, the commitment is still the term of the policy. i.e. If you decided on a 20-year policy, you have to pay for 20 years. Will your circumstances change after the ICP? Do you want more control in that you can choose to stop investing without having to pay account management fees at any time?

Say you decided on a particular fund and go ahead, and decide to switch to another fund several years later, you are limited to only the funds offered by the insurer. Should your desired fund be offered by another insurer, you are unable to switch insurers. As rightly pointed out by Cedric, most of these funds offered by insurers are available on other investment platforms. There might be a selling point should it be an Accredited Investor (AI) fund unavailable to the retail client. However, it's the same story regarding the many layers of costs involved in the maintenance of the ILP.

Successful investing for an individual is not about maximising returns or even maximising risk-adjusted returns (returns in return for the risk undertaken). It is about getting the best probability of meeting your financial goals so that you can achieve your life goals. With as little guesswork, and as little stress as possible. Perhaps you might want to have a read at https://advice.moneyowl.com.sg/the-right-way-to-invest. There are many ways to invest and ILP really isn't the best way. Seedly has a wealth of information on the many investment instruments available too! Be aware of the options available, read up more, and compare around before deciding :)

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Frankie Rappaport
Frankie Rappaport
Top Contributor

Top Contributor (Aug)

Level 9. God of Wisdom
Answered on 05 Mar 2020

We should not buy structured products of this kind, when we do not

comprehend them to the fullest.

Instead think of passive indexing ETFs, try to reas a lot.

some of my thinking here:

https://seedly.sg/questions/what-is-your-general-investing-philosophy-strategy

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If you're planning to start investing, there're many options and different asset classes to invest in. Investing via an investment-linked plan is not the only way. Some of the other options you might wanna look at are:

Together with an investment-linked plan, consider the pros and cons among the above-mentioned options and see which one or more of the following you would like to start investing with.

I hope this helps.

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Samuel Chin
Samuel Chin
Level 4. Prodigy
Updated on 03 Sep 2019

Glad that you’re considering seriously and doing your own due diligence.

I wouldn’t just dismiss and say ILPs are bad. If one knows how to utilise them properly, it is a very good tool. If all ILPs are bad, why do companies keep coming up with them and still able to sustain?

However, looking at your profile, you probably don’t need an ILP. Can just get life insurance and investment separately.

The best way is to get someone whom you trust and analyse your financial situation thoroughly with you. There are many ways to accumulate wealth, find one that you‘re most comfortable with.

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Jonathan Chia Guangrong
Jonathan Chia Guangrong, Fund Manager at JCG Fund
Level 9. God of Wisdom
Answered on 29 Aug 2019

I'd echo the sentiments of others here not to buy into an investment-linked plan. My bugbear is always on fees. Look at point 4 on this website to give you an idea of how fees erode returns: https://www.tonyrobbins.com/wealth-lifestyle/5-costly-investing-mistakes/

As Albert mentioned, work out your financial goal, your risk profile and see what investment instruments you can use to reach your goal. Seedly has a number of articles and discussions on the various instruments available to retail investors you can read up on.

All the best in your investment journey.

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Sg 30s Dude
Sg 30s Dude
Level 4. Prodigy
Answered on 28 Aug 2019

Rather than taking words from someone in this platform against your financial advisor, might be worth spending some alone time to sit down and recollect your session with the financial advisor.

Some of the points worth thinking about could be

1) The amount, period of commitment, expected net returns with this investment-linked plan

2) How does above compare to other available options such as high-interest savings acct/SSB/ETFs/REITs/Robo Advisors etc etc

These content on Seedly might be helpful as well.

https://blog.seedly.sg/ultimate-personal-finance-guide-to-investing-singapore/

https://blog.seedly.sg/ultimate-personal-finance-compilation-of-articles-for-fresh-graduates-first-job/

Some

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