By Gwendoline Tan
If you’ve only got a minute:
- ILPs combine insurance and investment in a single policy, offering convenience, flexibility, and potentially higher returns than traditional endowment policies.
- The structure of ILPs can be more complex, with varying fees and transparency.
- ILPs are long-term commitments, and as with all investments, returns are not guaranteed.
Singaporeans are known to value efficiency and productivity, so it’s no surprise that a product geared towards meeting both your insurance and investment goals in one can be an attractive option.
But is killing 2 birds with 1 stone the way to go?
In the case of investment-linked insurance policies (ILPs), it really boils down to your personal financial goals, needs and more importantly, how hands-on you want to be.
Before deciding on whether ILPs work well for you, it’s worth understanding what they are, how they work, and what to note so you can see how they might complement your overall financial plan.
What are ILPs?
Simply put, an ILP is a policy that combines life insurance coverage with investment components. This means that for an ILP, part of your premiums goes toward buying units in investment-linked funds, and the rest goes to buying insurance coverage.
On one hand, this potentially offers you the best of both worlds, letting you grow your savings through investments while also offering a level of protection.
On the other, this hybrid setup often involves multiple layers, such as fund management fees, insurance charges, and policy administration costs, which can make it harder to see the exact allocation of your premiums. This complexity can result in less transparency and potentially higher fees than keeping your insurance and investments separate.
If you only really need one or the other, ILPs may not be the best option for you.
How do ILPs work?
Given that your premiums are split between 2 purposes, there are naturally trade-offs to be made. If your ILP provides a high amount of coverage, a larger part of the premiums will go toward insurance charges, leaving less for investment growth.
Investment
When buying an ILP, part of your premiums goes into professionally managed investment-linked funds (i.e. unit trusts). In the context of ILPs, these are known as sub-funds.
Each insurer typically offers a range of sub-funds. Always do your due diligence in reviewing the investment approach, risk levels and expected returns of the fund. Select sub-funds that are aligned with your goals and aim for diversification across asset classes and geographies.
If you are purchasing an ILP under the CPF Investment Scheme (CPFIS), the CPF Board assigns a risk classification for all the funds offered in the scheme to serve as a broad guide to help you.
Account value
The investment portion of your ILP determines your account value, based on the value (price) of the units in your sub-funds, and fluctuates with market conditions.
If your investments perform well, there is potential for you to get higher returns on your ILP than other traditional insurance policies. On the flip side, in poor market conditions, remember that you bear the full investment risk and the returns are not guaranteed.
This is why ILPs usually do not have any guaranteed cash values, unlike traditional endowment policies.
Read more: Diversify to help manage investment risks
Fund switching
Many ILPs let you switch between funds to adapt to market changes or personal goals.
Check how many free switches your policy offers as some plans include unlimited switches or automatic rebalancing of your portfolio. If your policy doesn’t offer free switching or has a limit to it, find out how much you have to pay for any additional fund switches.
ILPs like Manulife InvestReady (III) and SmartRetire (V) offer unlimited free fund switches.
Compared to unit trusts or exchange-traded funds (ETFs), ILPs may save you switching-related fees like redemption or subscription charges.
Read more: A beginner’s guide to unit trusts
Find out more about: Manulife InvestReady (III)
Insurance
ILPs provide insurance protection in the event of death, and sometimes terminal illnesses. Sub-fund units are sold to pay for the insurance protection and other charges, while the rest remain invested.
Unlike many traditional life insurance plans, ILPs typically do not require medical underwriting (medical check-up to be done) for the base policy. While this may sound convenient, it may also affect the premium rates or coverage amounts.
Some ILPs may allow you to add optional riders (like total and permanent disability (TPD) or critical illness cover) or increase your existing coverage amount. These additions are usually subject to medical underwriting.
The death benefit offered differs from policy to policy. This may comprise the higher of the sum assured (which is usually a percentage of your total premiums paid), your account value, or a combination of both.
Premium payments
ILPs can be categorised by 2 premium payment modes.
Single premium ILPs
You pay a lump-sum premium upfront, which typically means more is allocated to investments but with lower insurance coverage.
These might be suitable for those who have spare cash lying around and prefer to have some investment exposure with a little bit of life cover on the side in case anything untoward happens to them.
Read more about: Is lump-sum investing or DCA better for you?
Regular premium ILPs
These involve recurring payments and use dollar-cost averaging (DCA) to manage market fluctuations.
Traditionally, when payments on regular premium insurance policy are missed, the policy gets terminated. With most ILPs, you can opt to take a “premium holiday” after the policy has been in effect for a certain period of time.
This allows you to pause premium payments, which is useful in unforeseen emergencies (like job loss). During this break, your existing investment units will be used to cover insurance charges.
Read more: Discipline, time, and patience in investing
Find out more about: Manulife SmartRetire (V)
Trade-offs
One of key benefits of ILPs is the flexibility that it offers. Some allow you to vary the level of insurance coverage as you go along, and others allow you to top-up and withdraw your investments to rebalance your portfolio (subject to charges).
Since premium payments are fixed at time of policy inception, this flexibility requires a trade-off between the amounts allocated to investment and insurance.
With ILPs, your investment units are sold to pay for your insurance coverage. This means that increasing your coverage involves selling more investment units to pay for the additional cover.
For regular premium ILPs, even though your monthly/yearly premium remains the same, insurance costs tend to increase as we age. This is due to higher risk of death, disability, and illnesses. As such, more investment units may have to be sold to pay for these increasing costs.
This reduces the amount left to grow your investments, making long-term performance of your policy less predictable.
Do note that in the scenario where you have a combination of high coverage and poorly performing investment funds, the value of your units may not be sufficient to pay the insurance charges. In this case, you will either have to top-up your premiums or reduce your insurance coverage.
In the event there is insufficient account value to deduct the applicable fees and charges, the policy will lapse and you will lose the insurance coverage.
Before you buy
ILPs may be marketed as a one-size-fits-all solution, but their complexity means they aren’t suitable for everyone.
Before committing, review the benefit illustration and fund factsheets, and ask:
As ILPs are designed for the long-term, they often come with higher fees and charges in the early years. This makes it important to consider your time horizon, financial goals, and comfort with market fluctuations before committing.
Early termination can result in hefty charges and in turn, poor returns.
One of the benefits of ILPs is that premiums allocated to investments can act as a form of forced savings. This consistent contribution, coupled with the long-term nature of ILPs, can facilitate significant compounding of returns over time.
Additionally, many ILPs offer the flexibility to switch between different investment funds or adjust premium allocations as your financial goals evolve.
If you prefer to keep your insurance and investments separate, you might want to consider holding term insurance alongside unit trusts or ETFs for greater control and transparency. For investors who prefer a more hands-on approach, you can also consider building your own diversified investment portfolio.
Alternatively, you can also complement an ILP with other investment vehicles. Use the ILP for its combined benefits while diversifying further through ready-made discretionary portfolio solutions like digiPortfolio or a selection of unit trusts.
Read more: Investing with only ETFs and unit trusts
Find out more about: CIO Insights Funds
In summary
An ILP can be a neat way to combine insurance protection with investment potential. Like any tool, it works best when it suits the job.
The key is to understand how it works, the cost, whether it truly fits your needs, and how it complements your broader financial plan. When in doubt, speak with a licensed financial advisor so you can turn your ILP into a well-aimed shot at both protection and growth.
