When it comes to investment-linked policies (ILPs), singaporeans either like it or hate it. Find out why.
What is ILPs?
ILPs provide the flexibility of choosing one ’ s protection and investment mix within a policy. But more flexibility can also create more complexity.
What are the benefits of ILPs? Read on to find out.
Benefit 01: Death and illness coverages of ILPs are separate
Claiming for early/intermediate (ECI) or critical illness (CI) will not affect the death coverage of the policy:
Benefit 02: Premium Holiday
Should we temporarily be unable to pay premiums (e.g. retrenched during a recession), we can opt for premium holiday. The insurance coverage will continue so long as all fees and charges can be deducted from the policy’s investment value. We do not have to pay back the used investments, nor the monthly premiums that we missed.
Benefit 03: Partial withdrawal of our investment
When in need of cash, we can partially withdraw our investment (up to $1,000 remaining balance) and do not have to pay back what we withdrew.
Benefit 04: Insurance coverage and premium are adjustable
It is possible to decrease the amount of coverage without decreasing the monthly premium or decrease the monthly premium without decreasing the amount of coverage.
Benefit 05: No need for multiple insurance policies
We can increase the amount of coverage, or add on other types of coverage, to the same ILP (subject to evidence of good health).
With BENEFITS, there are LIMITATIONS. Let's take a look at the limitations.
Limitation 01: Fees and Charges
ILPs have the standard policy fee, continuing investment fund charges, and assurance charges that may affect the investment returns.
01 (i): Continuing investment fund charge on the investment value
01 (ii): Assurance charges of a $2,000 annual premium ILP
Even with a modest insurance coverage of $100k, more than half of our annual premiums will be used to pay the assurance charges when we reach 50 yo. And in less than 5 years, the charges will even exceed our annual premium. At this point, we’ll most likely have only 2 options:
A: Use the policy’s accumulated investment value to pay for the balance of the yearly assurance charges, with the risk that the policy might get terminated when the policy’s investment value eventually drops to zero.
B: Lower our insurance coverage to keep the assurance charges affordable. This means that at age 75 (when we are most likely to claim from insurance), we would have to lower our coverage from $100k to only $15k! (to reduce total assurance charge to $2,762).
Limitation 02: ILPs may not be the safest instrument to use when you are retired
With retirement at 65, our average life expectancy at 85, and recessions occurring once every 10 years, we run a big risk of having to withdraw money from our investments even when the fund prices drop significantly during an economic downturn.
*You are encouraged to read our Oct 2019 article on What are the options for retirement for insights on retirement planning.
ILPs can very quickly transition from being the most ideal policy when we are young, to the least appropriate type as we get older. Hence it is essential for ILPs to be re-evaluated more proactively. It is also preferable to engage the services of someone who has relevant experience, as the periodic re-assessment of the suitability of an ILP and the options to restructure it, will require time and expertise.
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