The basics that you should know about an Investment-Linked Plan
Investment-linked plans (ILP) have gained a lot of popularity in Singapore in recent years. Chances are that you yourself have been approached by an insurance agent to take up this product. But do you really understand about the mechanics behind investment-linked plans in the first place?
In this article, we’ve put together a comprehensive information about what you, as a consumer, would need to know about ILPs before investing into them.
Firstly, you need to know that investment-linked plans can be split into two categories:
1. Single premium investment-linked plans: Pay a lumpsum premium to buy units into a sub-fund. For this category, the insurance coverage is generally lower than regular premiums ILPs.
2. Regular premiums investment-linked plans: Pay ongoing premiums (monthly, quarterly, semi-annual, annual) and the level of insurance coverage is adjustable.
Single premium investment-linked plans
For this type of ILP, a larger portion of the premium (compared to the regular premiums ILPs) can be invested immediately and directly into the funds of your choice to generate returns. If death or total permanent disability (TPD) were to occur, the coverage is typically 125% of the premium paid, while benefit payment is either the sum assured or value of invested units at the time of the claim, whichever is higher.
Regular premiums investment-linked plans
These are structured as such: you, as the policyholder pay a premium on an ongoing basis. This premium is then used to buy into selected investment funds. But not the whole premium that you pay will be used to invest in these funds off the bat.
ILPs in Singapore generally work in a way that only a small percentage of the premium will be used to invest in a fund in the first year, then slightly more in the following years and only eventually will the whole sum of the premium be invested in these mutual funds. The rest of the premiums paid during these years will be channelled towards paying fees and expenses. This is known as front-end loading.
We've put it in a table format to better illustrate this.
*This table is just an example to simulate how the regular premiums ILP works and does not in any way reflect any or all regular premiums ILPs.
Percentage of Premium Invested into
Conversely, there is back-end loading, which is when the full premiums are used to pay for fees and expenses upfront at the beginning of the policy. After the back-end loading period, then 100% of the premium is used to buy into the sub-funds of your choice.
However, at the end of the day, whether you choose to use the front-end or back-end loading policies, the value of your policy is dependent on the performance of the investment funds chosen.
Take note of those charges
1. Benefit charges
When you buy into an ILP, as it is still an insurance policy of some kind, you are required to pay a premium for the coverage (of death and total permanent disability). But it isn’t as simple as just paying for the coverage, which increase year-on-year, by the way. How ILPs work is that they use a bid-offer spread, which we talk about below.
2. Bid-offer spread
When the ILP buy units in a mutual fund (eg. 100 units at a $1 offer price each for your premium of $100), it needs to sell these units in order to pay for your insurance coverage (benefit charges). However, the units are sold at a bid price, which is normally lower than the offer price by 5%, so in this scenario, it is $0.95.
If your coverage is $50, the ILP would have to sell 53 units to cover that. And you would have lost $2.65 just like that. Now, $2.65 may not sound like much, but this is only an illustration of one month’s worth of losses. Compound that year-on-year with potential interest you could be earning from other forms of investment and you’re potentially looking at thousands of dollars in losses.
3. Surrender charges
In the event that you want to withdraw the cash value of the units purchased, it is subject to surrender charges. It may be considered an early termination of the policy and this is a costly thing to do, considering your cash payout may be less than your total sum invested.
4. Monthly policy fee
You are also subject to paying administrative charges every month.
So who should invest in this?
An ILP is great for younger investors who enjoy having freedom. ILPs can have attractive features such as allowing for partial withdrawal, premium holiday and even higher coverage with lower premium for younger individuals. Here are three points on how ILPs can offer more freedom to the investor:
1. You can adjust your insurance coverage accordingly
Just now, we talked about how the purchased in mutual funds are sold to pay for your insurance coverage. Well, your insurance coverage can be adjusted to your liking. You could opt for less coverage and pay lesser in insurance fees.
2. You can take a premium holiday
Most ILPs in Singapore offer the option of a Premium Holiday. This sounds more glam than it actually is. No, you’re not getting some kind of free holiday. What you’re getting is a short break from paying your premiums. So in times where you think you would like that extra liquidity to invest in something else, you can choose to stop paying the premiums for a while. But during this time, do note that the units from your mutual funds will continue to be sold to cover your insurance.
3. You get to choose which funds to invest in
This is good for those who like knowing exactly where their money is going into. But not so great for those who may not know which are the best funds to invest in. That being said, for those who are willing to put in the work to do deeper research, having this flexibility to pick the funds that you prefer can be a boon.
Investment-Linked Plans in Singapore:
Just to round things off, here is a list of the various ILPs in Singapore, in no particular order. Opening up an account can be as easy as simply contacting the respective insurance company or bank.
Lifetime Flexi by Aviva Singapore
Growth Invest Insurance Plan by HSBC Singapore
TM Wealth Enhancer Single Premium ILP by Tokio Marine
TM FlexiAssurance by Tokio Marine
TM FlexiCover by Tokio Marine
FlexiLink by NTUC Income
VivoLink by NTUC Income
Manulink Enrich by Manulife
Manulink by Manulife
Manulink Investor by Manulife
Manulink Flexi Protect by Manulife
PRUlink enhanced protector by Prudential
PRUlink heritage account by Prudential
PRUlink supergrowth account by Prudential
PRUlink supersaver account by Prudential
PRUselect by Prudential
Family First Secure by AIA
Asset Builder by AIA
Wealth Builder by AIA
Family First Protect by AIA
Asset Growth by AIA
Inspire FlexiProtector by AXA
FlexiPlanner by Citibank Singapore