What are investment-linked policies (ILPs) and how can you invest in them to elevate your wealth plan
22 Feb 2023

How ILPs elevate your wealth plan

Key points:

  • Investment-linked policies (ILPs) have unique features that can be used to enhance your wealth preservation, wealth growth, and wealth transfer plans.
  • Regular premium payments smooth out volatility through dollar-cost averaging.
  • Free fund switches provide flexibility to adjust your investment strategy at zero cost.
  • Policy payouts (higher of investment returns or death benefit) preserves wealth for the next generation.

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A robust wealth plan identifies the strengths of different products and harnesses them to address specific needs. This requires a deep understanding of the product’s unique characteristics, as some uses are less straightforward.

Take investment-linked policies (ILPs) for instance. Often associated with insurance, ILPs like most luxury timepieces are designed to outlast their owners. And like horology, which is the study of timekeeping, it requires a certain level of knowledge of what you’re buying into to maximise your investment. But once you get to know its unique features, ILPs can be a versatile accessory to enhance wealth preservation, wealth growth, and wealth transfer plans.

So if you’re looking to add ILPs into your portfolio, here’s what you need to know before you dive in.

ILPs are a timeless treasure for your wealth needs

How ILPs are a timeless treasure for your wealth needs

Wealth protection at reduced volatility

The double-digit losses in stock and bond markets in 2022 served a timely reminder on why having a diversified portfolio is key.

With regular premium ILPs, your monthly premiums are invested across time, and not all at once in a lump sum. While it may not always earn the highest return in the short-term1, the stability of regularly investing a fixed dollar amount means you needn’t worry about timing the market.

This dollar-cost averaging approach automatically reduces risks and smoothens volatility for policyholders, which is particularly useful in protecting your wealth during economic downturns.

Wealth growth that provides flexibility

Market conditions and your financial circumstances are never constant. But like how a classic steel can be worn on any occasion, ILPs provide the flexibility to adjust your investment strategy to meet your changing tastes and needs at any given moment in life at zero cost.

With the free fund switch feature, policyholders save on the redemption fees, subscription fees and initial sales charges that might be charged when switching between other types of investment instruments.

This also allows you to sample the expertise of different investment managers. For instance, if your selected sub-funds are falling behind other sub-funds with a similar geographical, industry, or asset allocation focus, you can switch to a better performing sub-fund. Caveat: historical returns are not a guarantee of future returns.

Investors reap the full benefits of free fund switches by holding the sub-funds for the longer term, instead of treating ILPs as a trading instrument to buy and sell sub-funds frequently. While insurers typically limit the number of free switches allowed (which means you would need to pay fees once you’ve exceeded that number), some insurers such as Manulife do allow an unlimited number of switches.

In addition, if you have some spare cash, most ILPs allow you to top up your investments as and when you want to. You can also withdraw from your investment as and when you want to. There is flexibility to invest more into a particular sector or type of fund.

Wealth preservation for the next generation

Most ILPs are lifetime commitments. Like heirloom watches, they can form a part of your legacy planning for your beneficiaries.

You see, no matter how the financial market is doing, the beneficiaries of ILP policies will not lose money. At the very least, they will get back the premiums paid by the policyholder.

ILP policies pay out whichever is higher:

  1. The market value of your sub-fund investment, or
  2. A death benefit that is the premiums paid, plus a small return.

When financial markets are thriving, a rising tide lifts all boats and your sub-funds are likely to be worth more than the death benefit. In this scenario, your beneficiaries will receive the market value of whatever you are invested in.

Flip this scenario around, and the wealth meant for your beneficiaries stays intact even when financial markets are struggling, as they will then receive 101% or 105% of the premiums you paid, depending on the policy purchased.

Best practices when investing with ILPs

Best practices when investing with ILPs

As ILPs involve investing in the markets, the golden principle is to treat them like you would an investment portfolio. Here are some of the best practices to adopt when investing in ILPs:

  • Monitor the performance of your sub-funds. If your selected sub-funds are falling behind other sub-funds with a similar geographical, industry, or asset allocation focus, the free switch feature allows you to switch to a better performing sub-fund. Caveat: historical returns are not a guarantee of future returns.
  • Invest with a longer investment horizon. Besides riding out market fluctuations, investing for the longer term helps to defray some of the initial costs that can limit potential returns in the short-term.
  • Rebalance your sub-funds regularly, at least once a year. While your ILP investments start out naturally diversified, asset classes perform differently in the same market, and this may shift the actual allocation away from your original intent.
  • Increase convenience with auto-rebalancing. By taking care of the administrative work for you, you can spend more time and energy looking at strategies, and reviewing if your asset allocation is still suitable for your risk profile, circumstances and needs.

Note: If this sounds like too much work and you prefer an accumulation solution to “buy-and-forget”, consider endowment insurance policies instead.

Preserve, grow or transfer wealth with ILPs.

Harnessing ILPs as part of your wealth

Whether you are looking to preserve, grow, or transfer wealth, ILPs can be part of the solution in your wealth plan that complements other investment and insurance products.

Interested to employ the unique characteristics of ILPs for your investment portfolio? Speak with a Relationship Manager for a comprehensive wealth plan that grows your wealth the way you want it to.

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1 Kate Dore, 6 Dec 2022. CNBC. Despite economic uncertainty, it’s a ‘great moment’ for dollar-cost averaging, says Betterment CEO. Retrieved on 20 Dec 2022 https://www.cnbc.com/2022/12/06/why-dollar-cost-averaging-may-pay-off-amid-stock-market-volatility.html

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Disclaimers and Important Notice
This article is for information only and should not be relied upon as financial advice. Any views, opinions or recommendation expressed in this article does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.