Investment Linked Policies (ILP)
Asked on 20 Nov 2019
What are the Pros and Cons?
Its hard to say an entire product class is categorically bad - there will be some segment that finds ILP appropriate.
That being said, my overall feel is that ILPs have extremely high fees when compared to a sum-of-parts comparison (ie managed funds with term).
Those fees are (hopefully!) justified through quality investment/insurance advice and customer experience. So definitely do not feel pressured to buy - you are paying for the sales agent's time and make sure you feel there is a good job done on the advice and support to justify.
There are 2 types of Investment-Linked Policies:
2) Investment-Oriented aka 101 ILPs
As usual, it depends on your objective, and your preferences. Do you want coverage, or investment?
Coverage ILPs are whole life with investments and a feature which allows for liquidity (ie cash surrender for withdrawal) and premium holiday for the tough times.
Whether it is a WL policy, depends on the investment as the mortality and morbidity charges increase with age, so if the investment isnt doing well, the charges will overtake the investment values and poof, policy gone.
I see it better to be viewed as a product for the Critical Years with flexibility than a Whole Life Cover. Or something that you can use to supplement your base/foundation life coverage.
2) Investment-Oriented ILPs (aka 101 ILP)
These generally are 100% investments with a 1 to 5% additional death cover on the overall surrender value.
Generally, 101 ILPs have a limited pool of in-house funds (which doesnt necessarily mean they suck. It just means you have lesser options) as compared to unit trusts. They are also still more liquid/flexible compared to endowment savings.
The key feature would be nominating your beneficiary, eg family member, for faster estate distribution compared to being a frozen asset upon your demise.
Hope it helps!
Hi Elise, my answer is there’s no perfect policy in the world, only what’s most suitable for you.
So it’s hard for any of us to give you an answer to your question as it’s very broad.
For some, they see ILP as a form of investment while some see it as a plan with a lot of admin fees for protection and investments.
Depending on what you’re looking at, your pros and cons will differ. What some will see as a pro, others will see it as a con.
My advice will be speak to your trusted adviser on why it was recommended to you, and see if it fits what you’re looking for.
It depends on what you are seeking for. A policy is bad if it doesnt meet the objectives you want. Every type of insurance has pros and cons, but dont let the cons distract you from the pros. ILPs typically are bad only because the clients that purchased them do not understand the ILPs well enough. If you were to understand what ILPs really is, you would be able to judge if it is suitable for you.
Some people prefer to keep insurance and investment seperate, some prefer it together. It really depends on you but do keep in mind that insurance and investment are never cheap, beware of those policies that have low premiums, may mean that the amount into insurance and investment is neither here nor there, and the end result is 1+1<2
Your question is a very general one and it's not possible answer it completely, especially with respect to your situation, unfortunately.
Whether or not a policy is bad, depends. If it fulfills your objectives in the manner you expect, then that is a policy that works. If it does not, then it would be a policy that is not suitable for you.
If you can provide more details, I would be able to evaluate for you.
Accordingly to an insurance agent I know who purchased the same policy for herself, the premium is fixed throughout your life.
Very expensive for the amount of insurance coverage you get because of the high costs charged to invest on your behalf, and over time these costs add up and will deplete your investements significantly.
If you are willing to spend the time to properly learn about investing which is a life skill, you will do so much better by investing on your own and use insurance purely for protection purposes.
Hope that helps!
Good question over here. I have been cracking my brain on the why for some time. And it boils down to 1 fact again which I have mentioned.
its just meant to reduce/remove the challenges of investing overseas where there is estate duty tax.
e.g as a foreign alien investing in US stocks, only the first $60k is tax exempted. Anything above, if it goes to your estate, will be subjected to a hefty 40% tax.
there are 3 ways to hedge this risk
(1) joint account with a loved 1 who can liquidate and transfer it to their account
(2) buy a term life insurance that covers it. The fees should be about 0.2-0.5% p.a of the intended coverage
(3) buy an ILP (hopefully with the lowest fees) to remove the tax.
however, with most fee structure, you will likely need to pay a range of 30k to 60k in fees for a 300k investment (after 20 years).
for Ireland domiciled,tax of 33% applies to foreign aliens after 310k. So take note not to invest above that.
We can only hope to learn more from each other. Credits to Chee Xiu Bin (great discussion) and Jonathon Chia GuangRong for the inspirations.
One thing for sure, it will first put money in the pocket of the ILP provider, then investment funds, and finally (if-any) the policy-holder.
No pros, all cons only
AVOID ILPS at all cost!
I agree not all ILPs are bad.
But all ILP can be substituted with a better ETF index investment and with a term plan coverage for your insurance needs = lower fees, more money for future.
Every investment instruments in the world has its advantages and disadvantages. Accordingly, it is only fair to evaluate after we fully internalise and understand the investment-linked policy's pros and cons and how it fits into your lifestyle and future.
If we have further context or details on your question, we can evaluate and give you further insights on whether it is good or bad.
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