Your guide to ILPs: What you’re paying for when you buy investment-linked insurance policies

This article is sponsored by Etiqa We all probably know someone in the insurance line, and it’s very likely that you would have been asked to consider purchasing an investment-linked plan (ILP). 
We’re told that it’s a way to grow your money while staying protected. But how exactly does it work?

Part insurance coverage, part investment 

At the core, ILPs are still insurance policies -- meaning they will provide financial protection in the event of death or total permanent disability. What makes ILPs different from other life insurance products are that it’s linked to additional investment components. It’s pretty much a 2-in-1 deal, though not without its own risks (which we’ll address later on), like any other investment.  ILPs typically come in two forms: 

1. Single premium ILPs, where you only pay a lump sum. These provide lower insurance protection than regular premium ILPs. 
2. Regular premium ILPs, where you pay premiums on a regular, ongoing basis and can tweak the level of insurance coverage provided. 

The investment money (or premiums) you pay are used to purchase what we’ll refer to as units in a fund. A fund is essentially a type of investment where retail investors can pool their money -- the fund manager will use this money to purchase assets like shares or even bonds, depending on what type of fund it is. These units are priced according to the fund’s performance.

How ILPs work 

Here’s an example. Let’s say you just bought a single premium ILP that’s front-end loaded. The policy requires a yearly premium amount of $5,000. You’re only paying this once a year -- but how is that money utilised? It might look like this: 

Policy Year	Premium Allocation Rate
1	15% ($750)
2	30% ($1,500)
3	50% ($2,500)
4 - 9	100% ($5,000)
10 onwards	102%* ($5,100)

*The additional 2% of your premium will be paid by the insurer, though this depends on your policy. 

What about the payout?

Depending on the policy, an ILP’s benefits will be taken from the following, whichever is higher: 

• The sum assured; 
• The value of the units in that fund; or  
• A mix of both. 

And, for those antsy about having their money kept from them: ILPs allow you to withdraw money from the investment fund portion at any point in time (so your units have to be sold off), whether it’s to fund an important expense like education or to help fund your house.   You can even take something called “premium holidays” where you can skip paying the monthly premium to attend to other financial needs. During these periods, your premium will still be paid -- just by the investment portion where your units will, once again, be sold off.  So, what’s not to love about an ILP? It sounds perfect -- you are able to cover yourself in the event of death or disability (so your dependents are protected, should you lose the ability to earn an income!) while still growing your hard-earned money. And you’ll constantly have access to said money at any point of time for liquidity.  Well, it’s not quite as simple as that.
It is an investment after all, hence, there’s a certain level of risk involved, the same way there will be risk involved when you buy stocks on your own, or any investment vehicle, really. And as investors, it’s on us to bear the full risk of what we’re getting ourselves into. Thus, no one, not even your agent, can guarantee you investment returns as ILPs usually do not have any guaranteed cash values.   At best, they can only project these numbers, and when they do well, you can get good returns, but as with investing as a whole, no one can really predict what happens in the markets.   Another financial drawback concerning ILPs are the additional fees involved.   ILPs typically charge an initial sales charge, which is separate from the monthly premium that you’re paying up. There is also a fund management fee for the funds that your money is invested in. This is similar to investing in unit trusts, where you pay professional fund managers to invest your money for you -- and hopefully earn great returns. If you’re already working on a tight budget, but you still want to invest, you’ll have to factor in these fees.   There may be other fees involved, so you need to do your homework before choosing an ILP. Some ILPs may have hidden fees, such as monthly recurring charges.   Depending on how well the fund performs, or how poorly, these additional charges might just end up negating your returns and cost you money instead, at least on the investment front. 

The gamechanger: Digital ILPs 

Recent years have seen ILPs take a new form with the introduction of digital ILPs. And while they still provide protection and investing in one policy, its construct is rather different.   For one, there’s no front loading charge, and 100% of your premiums are invested in units from the start. As it’s also “self-service”, management charge fees are lower than traditional ILPs.    And if you want to reallocate the funds in which your money is invested in, you can easily make the switch without incurring additional fees whenever your risk appetite changes.

Who are ILPs best suited for  

If you’re someone who values flexibility in their insurance policy, and would like to be able to customise and tweak the coverage and benefits, ILPs let you do that. Why would anyone want that flexibility? Because financial situations can change over time. For example: 

• Extra cash on hand: You get a good bonus at the end of the year, and instead of spending it, you can increase your investment value easily by topping up your policy. 
• A change in your insurance coverage needs: You decide you want to be more aggressive with your investments -- you can reduce the percentage of your premium dedicated to insurance costs to only 30%, and divert 70% towards buying more units instead. (In fact, some ILPs are designed more for wealth accumulation than for protection to cater to those of us who want to go ham on our investing.) 
• A change in your investment needs: Your risk appetite changes as you get older. You may invest in an aggressive fund that has a higher allocation to equities when you’re younger. As you get older, you may want to lower your risk exposure by switching to a more conservative fund that has a higher allocation to bonds.  

ILPs might also be suitable for people who know zilch about investing, and are either too busy or too intimidated by investing as a whole to even dip their toes in the lake.   In this case, it might be easier to seek advice from a professional fund manager to manage your investments. It’s probably much easier than getting on a brokerage platform and attempting to stock pick all on their own!  In summary, while ILPs have a bad reputation, they might work for your needs. You just need to be aware of how they work and what exactly you’re paying for.
Content sponsored by Etiqa Insurance  A message from our sponsor: If you’re looking for a hassle-free investment-linked policy, Etiqa recently launched Tiq Invest, a digital ILP. Unlike a traditional ILP, you don’t need an agent or an advisor to manage your policy for you. You can buy, top-up, withdraw your funds, as well as choose from 4 Packaged funds and switch funds, all online.   Because Tiq Invest is a digital ILP, you get to save a little bit on fees too. Tiq Invest’s management charge fee is 0.75% per annum and you can withdraw or switch funds without any additional charges.   Start investing now and get cashback up to $2,000. And if you refer a friend, you can also get $50.   Find out more information here.
Disclaimers  Tiq Invest is underwritten by Etiqa Insurance Pte. Ltd. (Company Reg. No. 201331905K).  Tiq Invest is an Investment-linked Plan (ILP) which invest in ILP sub-fund(s). Investments in this plan are subject to investment risks including the possible loss of the principal amount invested. The performance of the ILP sub-fund(s) is not guaranteed and the value of the units in the ILP sub-fund(s) and the income accruing to the units, if any, may fall or rise. Past performance is not necessarily indicative of the future performance of the ILP sub-fund(s).  A product summary and product highlights sheet(s) relating to the ILP sub-fund(s) are available and may be obtained from us via www.tiq.com.sg/product/tiqinvest. A potential investor should read the product summary and product highlights sheet(s) before deciding whether to subscribe for units in the ILP sub-fund(s).  As buying a life insurance policy is a long-term commitment, an 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 web-sites (www.lia.org.sg or www.sdic.org.sg).  This advertisement has not been reviewed by the Monetary Authority of Singapore.  Information is accurate as at 6th December 2021.