Pros and Cons of Investment-Linked Plans (ILPs) & Who Should Buy It?
A wealth accumulation tool, investment-linked policies may take some time for many to understand, especially with its extreme fund flexibility coupled with unexpected additional fees.
Let us help you break it down!
What is an Investment-Linked Insurance Plan (ILP)?
An Investment-linked insurance policy (ILP) is a policy that has life insurance coverage and investment components. Most policies contain various packaged funds with diversified risks for consumers to choose from according to their risk appetite. These respective funds would have various sub-funds in stocks, bonds, and more.
Premiums paid by a consumer would be used to pay for units in the sub-fund of their choice. Some allow consumers to choose their own sub-funds, while others have pre-allocated packaged funds for consumers to pick. When needed, some of these units purchased may be sold to pay for other charges, such as management charge fees. The management charge fee is charged monthly by deducting away the units that the customer has. The remaining amount would stay invested accordingly into the pre-allocated ILP Sub-Funds.
In the event of death, ILPs provide insurance protection for the policyholder. A claimant can be paid a lump sum payment of the policyholder’s account value or between 101% to 105% of the net premium. The net premium refers to the initial premium you placed in the policy taking into account any top-ups or withdrawals you made along the way.
There are two main types of ILPs – single premium ILPs and regular premium ILPs. With Single premium ILPs you pay a one-time lump sum premium which would be invested into a sub-fund. With regular premiums ILPs, you make premium payments on an ongoing basis. Single-premium ILPs typically provide slightly lower insurance coverage than regular premium ILPs.
| Net Premium = Total Premium Paid + Top-up - Withdrawals |
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Why Do People Get Investment-Linked Policies?
Many people get Investment-Linked Policies for the following reasons:
- For flexibility of cash flow in their insurance coverage and wealth accumulation.
- For wealth growth. These individuals mostly have their basic coverage already done up.
- For individuals considering temporarily taking a “one stone kill two birds” approach and are uncertain on whether to focus their finances on insurance protection or wealth accumulation.
Pros of Investment-Linked Plans
Liquid funds with zero lock-ins
As long as the minimum value needed is present in the account, most Investment-Linked Policies allow for partial withdrawals at any time throughout the policy’s lifetime. This gives users the option to draw from their policy if they are in need of cash now in the case of an emergency.
Moreover, many policies also give policyholders the flexibility to make top-ups according to their personal financial means. Some policies have options for both ad-hoc and recurring top-ups according to one’s preference, subjected to various minimum top-up values. You are able to adjust your premiums as your income grows so as to grow your wealth quicker with your Investment-Linked Policy.
Some Investment-Linked Policies also allow policyholders to switch their packaged funds to suit their financial means or risk tolerance. Other Investment-Linked Policies provide their policyholders with the option of a “premium holiday” where premium payments can be temporarily stopped without the policy being terminated. Both if these increases the flexibility of ILPs as a wealth enhancement tool.
Death benefit
With a death benefit, claimants upon a policyholder’s decease or officiation of terminal illness are usually able to retrieve a lump sum of money.
Cons of Investment-Linked Plans
Fees and charges
ILPs have many layers of unseen costs. Often, these fees amount to a hefty price. Sometimes more expensive than separate life insurance policies and investments combined. Below is a chart of ILP fees and charges from the Monetary Authority of Singapore.
As a result, the premiums placed into Investment-Linked Policies are not fully used to invest as some would be used to foot the costs of these fees.
Relatively higher risk compared to other options
It is important to read the fine print when purchasing an ILP. Like other financial investment products, an Investment-Linked Policy carries investment risk, and does not always provide guaranteed returns. This may make ILP’s unfavourable when compared with other life insurance alternatives, like an endowment insurance plan.
With non-guaranteed policies, to keep losses within their policyholders’ risk appetites, insurers have different packaged funds with diversified risks to suit different consumers.
When policyholders have full control over choosing their packaged funds, policyholders need to bear the financial risk of their investments. Hence, it is crucial for you to be aware of the amount of risk you are willing to take prior to purchasing a packaged fund. If you have the financial capacity to afford this risk, investing in an ILP might potentially bring returns higher than other participating plans (eg. whole life policies or endowment insurance plans).
What Should I Look Out For Before Investing In An Investment-Linked Policy?
When choosing a suitable ILP, it is important to avoid common misconceptions. Beyond that, below are some traits that you can look out for when considering to purchase an ILP.
A low and affordable starting premium
This gives you room to experiment without breaking the bank. In the event that you wish to withdraw completely from the ILP, any penalties will be minimised as well.
Clear packaged funds
Compared to ILPs that allow policyholders who might not have the necessary investing knowledge to pick their own sub-funds, packaged funds are sub-funds pre-picked by insurers that are experienced in the market. This allows ILP investors a clearer understanding of the financial risk they are taking when they choose to purchase an ILP. Through this, they will be able to better select a fund that is more suited for their risk appetite.
Clear charges and fees
Clear charges and fees will help you estimate the total cost you might incur if you choose to purchase this ILP. This will allow you to better see where it will function in your financial plan, and weigh the growth it may achieve in the long run.
Alternatives to an ILP
[Note: The trache for Great Eastern GREAT SP 10 has closed.]
GREAT SP Series 10 is a short-term single premium endowment plan.
With a starting principal sum of S$10,000* and a maturity period of only 1 year, policyholders are able to get 4% guaranteed returns and 100% capital guaranteed at maturity. This rate is extremely competitive and is comparable with some of the fixed deposits with higher returns that are currently available on the market.
What makes the GREAT SP Series 10 policy more attractive than other investment vehicles with similar returns such as fixed deposits is that it provides added insurance protection with guaranteed acceptance. GREAT SP Series 10 provides coverage against Death and Total and Permanent Disability at no additional charge. This protection comes as a lump sum payment to the policyholder’s claimant. It would be either 105% of the single premiums paid or the surrender value of the policy, whichever is higher, less any indebtedness under the policy.
The whole premium is invested upon initiating the policy. Policy protection will be up to specified limits by SDIC.
This policy can be purchased by any Singapore Resident with a valid NRIC or FIN between the ages of 17 to 80 (age next birthday), subjected to full knowledge and understanding of the requirements demanded by the plan.
*For the starting principal sum of S$10,000, the minimum single premium amount will depend on the entry age (as of next birthday) of the life assured and the payment method.
The table below showcases the features of GREAT SP Series 10.
| Details | GREAT SP Series 10 | |
|---|---|---|
| Premium | Single Premium | |
| Principal Capital | Minimum of S$10,000 | |
| Returns | 4% guaranteed returns | |
| Maturation Period | 1 year | |
| Insurance Protection upon Death or Total and Permanent Disability | The higher of the two:
| |
| Are there additional insurance charges? | No. There are no insurance charges. | |
| Amount of premium invested | 100% of the premium will be invested. | |
| Policy Protection | Up to the specified limits of SDIC | |
How Can I Learn More About GREAT SP Series 10?
Learn more about GREAT SP Series 10 here!
The policy is underwritten by The Great Eastern Life Assurance Company (Company Reg. No. 190800011G).
As buying a life insurance policy is a contractual commitment, early termination of the policy usually involves high costs and the surrender value, if any, that is payable to you may be zero or less than the total premiums paid. You should seek advice from a financial adviser before deciding to purchase the policy. If you choose not to seek advice, you should consider if the policy is suitable for you.
This content is for reference only and is not a contract of insurance.
Full details of the policy terms and conditions can be found in the policy contract.
This policy is protected under the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC). Coverage for your policy is automatic and no further action is required from you. For more information on the types of benefits that are covered under the scheme as well as the limits of coverage, where applicable, please contact us or visit the Life Insurance Association (LIA) or SDIC websites.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
Information is accurate as of article reviewed date i.e. 07 March 2023.