Investment-Linked Policies (ILPs) in Singapore

SINGAPORE: Investment-Linked Policies (ILPs) are becoming increasingly popular as they promise a combination of investment growth and life insurance coverage. However, with their complex nature, potential investors must tread carefully. As investment sage Warren Buffett wisely remarked, “Never invest in a business you cannot understand.” So, are ILPs the right choice for you, and if you're already invested in one, how can you effectively manage it?

In a recent discussion on the YouTube channel 1M65, Singaporean entrepreneur and founder Loo Cheng Chuan delved into the intricacies of ILPs with insurance veteran Eddy Cheong, CEO of Havend, and Christopher Tan, CEO of Providend Ltd—Singapore's pioneering fee-only wealth advisory firm licensed by the Monetary Authority of Singapore (MAS).

Understanding ILPs: The Two Types

Mr. Cheong clarified that there are primarily two types of ILPs: protection-based and investment-only. He likened ILPs to whole life insurance plans, which have a cash value, but highlighted a crucial difference: ILPs do not guarantee cash value growth. Instead, all premiums are invested in high-risk unit trusts, leaving investors to decide where to allocate their funds between equities and bonds. “When you enter into an ILP, you must understand what you're getting into because there is no guaranteed cash value,” Mr. Cheong cautioned.

He pointed out that ILPs come with inherent risks. As insurance charges often escalate over time, if the cash value of the policy does not appreciate sufficiently, the risk of the policy lapsing increases. This is particularly concerning for investors who might not be aware of how the market fluctuations can impact their investment and coverage.

The Downsides of ILPs

Mr. Tan raised concerns regarding the practicality of ILPs by discussing how protection-based ILPs function similarly to a blend of term insurance and unit trusts. For most investors, it is usually more advantageous to purchase term insurance separately and invest in low-cost index funds, like an S&P 500 ETF, which typically offer better returns with lower fees. He noted that ILPs typically carry charges ranging from 1.5% to 1.9%, partly due to the funds being actively managed—making them less appealing compared to more flexible alternatives available in the broader market.

Furthermore, he highlighted that an investment-focused ILP offers minimal protection—often just 1% over the cash value—which is considerably insufficient for those needing substantial insurance coverage. “If your main objective is to invest, consider allocating your resources elsewhere,” Mr. Cheong advised, underscoring that ILPs are primarily designed for investment, not extensive coverage.

Navigating ILPs: What to Do If You Already Have One

For those who find themselves already invested in an ILP, Mr. Tan and Mr. Cheong offer several strategies to optimize the policy:

1. Assess Your Coverage Needs: Determine whether you still require lifelong coverage and if it fits your current life goals.

2. Reevaluate Your Policy Purpose: Consider repurposing your policy for specific needs, such as critical illness or medical expenses, which could be covered by a portion of its value.

3. Health Condition Update: Regularly check your health status. If you are in good health, you may have options to switch to different types of insurance.

4. Paid-Up Mode: For those with pre-existing conditions, switching to a paid-up mode allows you to stop premium payments while maintaining a form of death benefit.

5. Transfer to Family Members: Instead of selling your ILP in the secondary market, consider passing it on to a trusted family member who can continue the premium payments and benefit from the policy.

Mr. Tan reassured policyholders, saying, “It’s not all doom and gloom. There are ways to restructure and optimize the benefits of your ILP.”

In summary, while Investment-Linked Policies offer a hybrid of investment and insurance, understanding their complexities is crucial for making informed decisions. Whether considering one or managing an existing policy, thorough research and strategic planning are key to achieving financial security in Singapore’s dynamic market.