6 things you thought you knew about ILPs
An Investment-Linked Policy or ILP is an insurance product that offers the protection of an insurance policy, with the addition of giving you potential investment returns. Despite their popularity, people find themselves in a trail of misconceptions about ILPs.
Let’s investigate the truth behind common myths about ILPs:
Myth #1: ILPs = more expensive insurance.
Just like regular insurance policies, premiums paid guarantee you insurance coverage.
However, ILP premiums do more than that. They are also used to invest in professionally-managed sub-funds. The intent is for the ILPs to offer potentially higher returns, compared to savings accounts or fixed deposits.
Myth #2: They are risky, and returns are minimal.
What goes down, must come up – at least in the long term. Over the course of 15 to 20 years, professionally-managed funds aim to even out the troughs of market fluctuations.
Instead of just looking at current or past results, pay attention to the annualised returns. This will help you weigh the risks involved against the returns you get, to see what you’re comfortable with.
Myth #3: ILP premiums get more expensive as you get older.
An ILP’s premium is used not only for coverage, but a portion is also allocated for investment. Since there will be higher protection cost as you age, the investment units in your ILP can be sold to make up for the difference. This ensures that your regular financial commitment towards premiums will not be impacted.
You can keep premiums constant by setting limits on your coverage, or cap the risks taken by sub-funds. Your approach to ILPs should be dependent on the financial goals you want to achieve.
Myth #4: The sub-funds in your investment are fixed.
ILPs offer a range of sub-funds with varying levels of risk for you to pick from. As there are so many to choose from, you may wonder where to start. To help you, your financial advisor can recommend a mix of sub-funds that are suitable for you based on your risk appetite.
So, while you can pick and choose your own sub-funds, you don’t have to. You can leave it to the professionals and still control your investment, without getting into the fine details.
Ultimately, you’ll have the final say over what you want in your ILP.
Myth #5: Once you choose an ILP sub-fund, you’re locked in.
Moving your money between sub-funds is easy. Most ILPs offer the first few switches free of charge. There are also ILPs that allow free fund switching regardless of the number of switches.
You can speak to your advisor if you aren’t satisfied with an ILP’s performance, you don’t have to feel stuck with your initial investment decisions.
Myth #6: It’s difficult to track your ILP investment’s performance.
The latest performance information is always available publicly in newspapers such as The Straits Times and Lianhe Zaobao, or on most insurers’ websites. Your financial advisor should also update and advise you regularly on your ILP’s performance.
ILPs are just one of the ways to diversify your portfolio and have some control of your investment strategy without being actively involved yourself.
Verdict is, as with all investments, weigh your approach to ILPs according to your financial goals and risk appetite. And be sure to talk to your financial advisor whenever you have doubts or questions about your policy.