Charges of an Investment Linked Plan (ILP)

Dear Mr Tan,

What are the charges that I have to pay, when I invest through an ILP?

REPLY

If you buy an investment-linked plan (ILP) through an insurance company, you have to bear the following charges:

1) Lump sum investment (i.e. Single premium)

You pay the Spread, which is the difference between the Offer Price and the Bid Price of the fund. This difference is usually between 3% to 5%. The spread can be reduced during promotions.

You buy the units at the Offer Price and sell at the Bid Price. So, you lose out on the Spread.

There is a minimum amount for a lump sum investment, for example, $5,000. You will be allowed to top up your investments at any time with "recurring single premiums" subject to a certain minimum.

In addition, there is an annual charge that is deducted from the fund. This charge can take from 1% to 2% of the fund, and is deducted from the yield.

You may also have to incur an initial and annual policy fee. The amounts tend to be quite small. It may be waived if you have a larger investment.

You have to pay for the mortality charge separtely, In some cases, this charge may be waived. In other cases, it can be quite costly. A journalist describes it like "a time bomb".

2) Regular investments (i.e. monthly investments)

You have to pay all of the charges described above (for the lump sum investment) plus an additional Distribtion Cost.

The Distribution Cost is used primarily to pay the commission to the agent and other marketing expenses. This cost is shown indirectly as an "allocation".

For example, the ILP policy will state that 20% of the premium is allocated for investment during the first year, and 50% is allocated during the second and third year. 100% is allocated from the fourth year onwards.

This means that 80% is taken away during the first year, 50% during the second year and 50% during the third year. The total is 180% or 21 months.

This website shows the additional Distribution Cost from various ILP plans in the market
http://www.askdrmoney.com/Ins_ILP_RP.htm.

The Flexi Link plan from NTUC Income has the lowest charge among the various ILP plans (apart from Do It Yourself). You do not have to pay the additional Distribution Cost. The expense ratio of the Combined Fund from NTUC Income is among the lowest of all the funds.

Some savvy investors can enjoy low cost by buying unit trusts directly from the internet portals, such as Fundsupermart or DollarDex. However, the expense ratios of many unit trusts are quite high (i.e. more than 1.5% per annum).