Tuesday, May 11, 2010

Investment Linked Policy

I have often been asked for my views about an investment-linked policy (ILP). It separates the term insurance and investments. Do they provide good value to the consumer?

In most cases, they provide poor value for the following reasons:

a) A large part of the savings for investments is taken away to pay the "distribution cost"
b) The premiums charged for the death benefit and riders are quite high
c) The distribution cost and effect of deduction are usually higher than the traditional policies
d) The projected returns are optimistically and potentially misleading.
e) Many consumers find the benefit illustration to be too complicated to understand.

In most cases, the consumer is better off in buying the death cover and riders in a separate policy and to get competitive quotes from several companies. The best cover is the group term insurance offered by SAF,  SAFRA and NTUC. Most people are eligible to participate in these policies.

It is better to invest in a low cost investment fund, such as the STI ETF available on SGX. This is explained in my book on financial planning, which is available here.

Tan Kin Lian


Anonymous said...

The regular ILPs are rip off and it is similar to traditional wholelife. The commission from this product takes a big chunk of the premium that it leaves the plan paralised.The commission is 50% for first year, 25% for next 2 years and 5 % for next 3 years. No difference from traditional wholelife and it is popular with insurance agents for obvious reason. Worse this product can be manipulated because of its flexibility and the agents exploit it by designing it to look attractive, eg high protection and convincing the buyers that it has potentials of 5%-9% return.Don't be misled.
Compared to the traditional wholelife and this product is a lesser evil. Nevertheless they are both evil.
Remember to avoid this product and other products like wholelife, limited payment WL, endwoment and anticipated endwoment disguised as cashback, coupon or dividend. They are scams that rip off your hard earned money.

Anonymous said...

Adrain Khiat wrote to the ST forum and Today to give his view on regular ILPs but not published.
The newspapers have vested interest and they don't want to be seen as anti insurance companies who are their sources of of advertising revenue. The problem is the consumers are losers and their cause is never championed by the press when there is conflict of interest.This is sad. Money talks louder and can make people compromise their values and can turn insurance agents into devils.

Unpublished Forum Letter on ILP

This letter was sent to Straits Times and Today’s Forum Page 2 weeks ago and disappointed that it was not published…

Review Commission Structure of Investment Linked Policies

Investment Linked Policies are life policies offered by insurance companies that provides a combination of protection and investment. The premiums paid are used to buy life insurance protection and investment units in professionally managed investment-linked fund.

Most regular premium investment linked plans are designed with high upfront charges in the initial years largely to pay the commission to the agent and the insurers’ administrative cost. The upfront charges, excluding mortality and morbidity charges can amounts to as much as two out of three years of premium paid. Some ILPs imposes a heavy penalty to the consumer if he is to surrender the plan before specific years of continuous investments which can be as long as 8 years. Another type of ILP locked up 18 months premium for up to 25 years where a high annual expenses are taken from that pool of 18 months premium.

It is also not fair to the consumers when the agent who sold them the ILPs, received all the incentives and left the industry. As a result, the policyholder are left with no adviser for their investments after paying all the charges.

I will like to propose to Monetary Authority of Singapore to review the current commission payout structure with the insurance companies where commissions are paid largely upfront. The current system tends to encourages more sales in the short term than providing advisory in the long run.

Anonymous said...

Have you ever heard the ST, Today bashing the insurance agents or their company or their products? Is it that the insurance agents are angels and unblemished? No..it is about money, revenue , about income from the ads they place, full page ads. The press is being held to ransom.

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