In our newsletter on 21 Feb, we asked for your ILP-related questions. We grouped them into three key ones.
Q1. What should I do if I realise my ILP is not suitable for me anymore?
Any decision to surrender an insurance policy, including an ILP, must not be taken lightly. Consult a licensed financial adviser to assess your ILP’s insurance coverage in relation to your overall portfolio and current health status. Evaluate its investment performance, policy charges, and fees to determine whether it’s more beneficial to hold or surrender the policy.
If your ILP is a key part of your protection plan, keeping it may be beneficial, but be aware of rising charges as you age.
If fees are high and insurance benefits are minimal, switching to term insurance and more cost-effective investments could be a better option. But it depends on your health situation and other factors.
Alternatively, if your ILP is close to breakeven or surrender fees decrease over time, holding it longer might be one of the options to consider.
Q2. Why do people buy ILPs?
In the event of death, ILPs today return the higher of 101% or 105% of premiums, or the value of investment units. This is combined with the idea of accessing potentially higher returns.
Insurers have innovated the ILP structure in recent years by changing its cost structure and adding incentives such as bonus investment units, making it appealing for consumers.
However, as our CEO and Chief Investment Officer Chuin Ting Weber recently cautioned in an article in The Business Times, such plans do not provide sufficient death cover.
“Saving and investing through an ILP does not give you sufficient protection, as it takes far too long to accumulate sufficient value equivalent to the coverage needed, even at a high projected return.
“Given that the primary purpose of insurance is protection, we recommend that consumers have at least the basic core coverage first.”
Bonus units may appear attractive, but this comes with the trade-off of penalties for early surrender if premiums are not paid in the early to mid-term. While there is an argument that the lock-ins help to keep one invested, you might want to consider if you are paying too much for this and other features.
Over the long run, high fees and charges may erode both the bonus value and investment returns.
Q3. Who might be a suitable audience for ILPs?
The modern ILPs’ structure require a long time horizon, low cash flow needs and an ability to select a suitable investment fund.
While the structure itself has advantages, so far, the suite of ILPs available in the market and the investment funds available come with high fees and charges.
Until we find a cost-effective ILP, MoneyOwl does not recommend ILPs as a way of building wealth.
If you require assistance from an adviser, we can refer you to our partner via this link:
Follow MoneyOwl on Facebook, Instagram or LinkedIn to keep in touch!
Disclaimer:
While every reasonable care is taken to ensure the accuracy of information provided, no responsibility can be accepted for any loss or inconvenience caused by any error or omission. The information and opinions expressed herein are made in good faith and are based on sources believed to be reliable but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. The author and publisher shall have no liability for any loss or expense whatsoever relating to investment decisions made by the reader.
