Answering Singaporeans' Question: Should You Cancel Your Investment-Linked Policy (ILP)?

A typical Singaporean’s experience with an Investment-Linked Policy (ILP)

I was sold an investment-linked policy. Equipped with minimum knowledge on insurance upon graduation, I went on to seek advice from an agent and were recommended one single plan that takes care of all my needs. It allows me to invest and save with only $100 each month. To top it off, there is an insurance element to it!

“I was sold, until years later, I cancelled my policy at a loss.”

* Disclaimer: Seedly has a neutral standpoint when it comes to every insurance policy. We are not against ILP and stand by our belief that there will always be a particular group of people benefiting from every type of policy.

Is Investment-Linked Policy (ILP) really that bad?

It will be UNFAIR to label any policy bad. The fact that a certain policy is approved by the Monetary Authority of Singapore (MAS), it means that it does cater to some of Singaporean’s needs.

Here are some facts about ILP:

ILPs are policies that have both life insurance coverage and investment components in it.

• 13% of the insurance products (according to LIA Singaporer) sold in the first half of the year 2016 were investment-linked products
• Premiums are used to pay for units in funds which your policy is tied to
• Some units you purchased are sold to pay for insurance and other charges when there is a need

Pros

• ILPs have a wide range of funds for the policyholder to choose from. Some of these funds require a high initial capital to invest.
• ILPs allow one to move his investment from one sub-fund to another in an event that there is a change in risk appetite of the investor.
• Premium Holiday: One can request to stop paying for your ILP for a period of time.
• Some of the ILPs give policyholder the flexibility to adjust the insurance coverage and investment allocation whenever needed.

Cons

• Allocation rate: The full amount of your premium will not be used to buy into investment units for your early years. This method of front-end loading ensures that distribution and administration cost is incurred on the policyholder during the early years of his policy. For example:

source: moneysense 

• Returns are not guaranteed. The value of your ILP depends on a lot on the performance of the sub-fund which you have chosen.
• More units may be deducted to pay for higher insurance coverage charges which usually comes with age. A poorly performing fund coupled with an increased insurance cost may result in one having to top up his premium payment or reduce his coverage for the insurance portion.

TL;DR: Food for thought on your ILP

We understand the many negativity surrounding an ILP online. Like all of your other insurance policies and investment decisions, below are 5 questions to ask before coming to a conclusion.

• What was your intention when getting the policy? Is the policy still on its way to helping you meet that objective?
• Can you invest at a lower cost?
• Are you able to invest on your own and fetch a higher return?
• Are you well-covered or have plans to get insurance coverage after cancelling your ILP?
• Does it make sense to carry on with the ILP in terms of cost and its functionality?

” In short, if you are disciplined and know enough to do better financially and in terms of coverage, go ahead and cancel that policy! If not, stick to it.”

Community Learning on Investment-Linked Policy (ILP)

If you reached this part of the article, it probably means that the ILP is probably not what you need. There are usually two schools of thought moving forward.

• Cancel the policy at a loss and move on with life
• Make some changes to the policy to suit your needs better, and carry on with the policy

The topic on Investment-Linked Policy has been a frequent topic amongst Seedly’s community members simply because many are sold the product in the past. Here are some of the valuable lessons from the community with regards to ILP.

Option 1: Cancel the policy at a loss and move on with life

Seedly Personal Finance Community:

• Kai Ling: Had a monthly ILP of $200 and the fund was invested in the SG equity market.The policy only gave her a 10% return over 10 years. This was despite the market doing well Straits Times Index (STI) being at a high in early 2017.Should I had terminated it during a market downturn, I might not have broken even.
  Should I decide to do my own investing I can probably get around 5% yield a year simply by investing in REITs.
• Xiaohui: One important thing to consider, is the health condition of the policyholder while having the plan? If the policyholder is healthy with regular check-up, he can consider terminate the plan and be better off with other policy combination.
• Yuan Quan Tay: ILPs are not suitable as an investment. When it comes to ILP for insurance needs, a limited-pay whole life plan might be a better option.
  A whole life plan that covers $300k Death/ Total and Permanent Disability (TPD), $150k Critical Illness and $150k Early Critical illness will cost about $3k a year for 25 years. After which she stops paying and the policy covers her for life.In contrast, an ILP,  one have to pay till 99(beyond retirement) while the underlying funds are subject to market fluctuations, it seems like a whole-life plan provides more guarantee and stability.
  Insurance should be about stability and predictability. For a more apple to apple comparison will be to purchase a 10-years renewable term with the same sum assured, constantly renew the term while investing the remainder into unit trust all the way till 99(or when I die).How will the calculations pan out with the exact same assumption of 8% year on year?
• Alan Kor: Never mix insurance with investment. The only person losing out is you, not the insurers and definitely not the person who sold you the plan. One can choose to cut his losses given that returns are not guaranteed. After that, get a term to cover death, critical illness and total and permanent disability(TPD).

Hardwarezone.sg:

• Cancel it and get a term plan. After which, invest the difference in low-cost instruments such as Exchange-traded funds (ETF). An attempt to break is rather pointless due to the exorbitant fees. One may be better off doing their own investments.
• Experiencing that short pain and bagging the loss is better than bearing with the pain in the long run.

Option 2: Make changes and carry on with the policy

Seedly Personal Finance Community:

• Christopher Quek: I had an ILP for 8 years and the investment results have been negative returns. I would have surrendered it if not for the health insurance component. The decision is partly due to my age, and the premiums to get a brand new health insurance coverage becomes too high.To overcome this, I surrender 90% of the investment after 10 instalments and took the funds out for other uses. So in essence, I still got my insurance policy but paid a small penalty to withdraw the funds out.

• Min Han: A policyholder needs to analyse his current insurance policies. Do not cut the plan unnecessarily if it leaves him without coverage (especially if he might potentially find difficulty in getting insurance coverage). Check what are the fees involved in him surrendering the plan early. One needs to read up the papers on his policy, as brochure does not give much information. Do a proper breakdown of current value and all costs involved if he really does decide to cancel the plan. While I’m not supportive of ILPs in general, they aren’t “bad” per se. It is the costs involved that make it a less than ideal option. It’ll be more worrisome if an ILP is the only insurance policy one has. It will likely result in the paying for premiums via the selling of units and this becomes a problem once one gets older due to increase in insurance premiums. One may end up getting torn between paying your coverage charges and trying to grow your wealth.

• Jit Nung Wong: An ILP name is misleading if you purely look at it as an investment tool; Especially so if the premise of you getting the policy on was for protection purposes.
  One can approach his Financial Consultant for a strategic review or fund switch if you do not believe in the mid-long term performances.
  Premium allocation for your policy is over-compensated at 105% from the 10th year onwards. Hope that helps in your weighing of your options.

• Cathie Chew: I am still holding ILP policy (PruLink Assurance Account) which I bought in 1994.This policy has served me very well as I was able to make withdrawals for the past 23 years without incurring interest. For traditional policies, there will be loan imposed at 5.75% to 8% interest depending on which insurance company.Bearing in mind, I do not plan to keep it beyond 65 due to high mortality charges that would drastically diminish the policy cash value. I do have a traditional policy to supplement my coverage when I surrender the ILP policy around age 60-65.

Hardwarezone.sg:

• It really depends. If you invested a small amount, you can re-look at the funds and choose a more aggressive portfolio to try to make some money. One can try to see if he can re-balance.
• One can channel all your 100% to investments without the insurance portion. Change the underlying fund if you have to. However, note that constantly changing funds often end up making things worse. Joel Greenblatt has written about how the performance of mutual funds swings about which makes relying on historical performance unreliable in predicting future performance. Mutual funds also typically losing to their benchmarks and to low-cost index funds especially ETFs.

Further Reading: Things to consider when being approached by an agent trying to sell you an ILP

• What exactly is the objective of you getting the policy? Does it make sense to get an ILP or to get an individual insurance and invest the rest on your own?
• Some agents may come forward and show you charts like the one below, to show the profitability of the life insurer that they represent. Do note that the percentage is not a full representation of what the consumers will get. Percentage of this excludes management fee and administration fee which can add up to a huge amount.
• Always read the fine print of your policy and keep a lookout for charges and fees.
• Many times the terms and conditions are written in a way whereby it is difficult for an average Singaporean to understand, ask around for a second opinion, be it from your friends or a Personal Finance Facebook Group.

Read also: Working adult: 4 frequently asked insurance question