Investment Linked Policies (ILP)
Asked on 29 Oct 2020
Are there a lot of people who discriminate against ILP? Given the size of the insurance industry, I think it's probably a vocal minority.
Nonetheless, I personally do not intend to buy ILP for a few reasons.
Cost. Many ILPs pay high commissions to the agents who sold them. Who do you think pays these agents? The fund manager? Insurance companies? Ultimately, these commissions come out of your pocket. These can be as high as 5-10% of the amount you put in. Imagine investing in the market and taking a 10% loss on day 1. It doesn't make sense. On top of that, the fund managers typically charge a hefty management fees as well. While 1%-2% don't sound like much, it compounds over time. You can be looking at 30-40% lower returns over 20 years.
Complexity. Linking investments and insurance tends to complicate things. Do you know how much protection you are getting from the policy? Dunno, it's tied to performance of the investments. That doesn't sound reassuring.
Alternatives. Above all, there are much better means of investing and getting protection at the same time. You can try sign up for an account with a discount brokerage, or invest with one of the roboadvisors. Their costs are typically much much lower.
That said, there is a reason why ILPs are still a thing. I do see a few advantages of using ILPs.
04 Nov 2020