The Ultimate Guide to Investment-Linked Policies (ILP)

• What is an ILP?
• Pros and Cons of ILPs
• What to look for when choosing sub-funds
• What to consider before buying an ILP

What is an ILP?

An Investment-Linked Policy (ILP) is a hybrid financial product; it provides both life insurance, as well as wealth accumulation.

When you purchase an ILP, your premiums are used to buy units in various sub-funds. These sub-funds are portfolios of assets that are managed by full-time financial professionals (i.e. an expert handles the buying and selling of assets in the funds, to generate returns for investors).

Besides generating returns for you, units in the sub-fund are also sold to pay for insurance, administrative charges, and other costs. For example, you don’t need to pay separate premiums for the life insurance provided, as the units in your sub-funds are used to pay for the coverage.

ILPs offer basic life insurance and give payouts in the event of death or Total Permanent Disability (TPD). Some ILPs may also cover other conditions. For example, Inspire FlexiProtector provides coverage for terminal illness throughout your lifetime, with an option to add on critical illness cover.

At the same time, ILPs may be able to help you grow your wealth faster than typical fixed deposits or savings accounts (although returns are not guaranteed).

This is different from term life insurance, which only covers you for death and disability but offers no other payout, with the exception of some policies that come with riders.

ILPs can be single premium (you pay a single lump sum for the policy), or regular premium (you pay premiums on a monthly or annual basis, as with most other types of insurance products).

The main difference between the two is that single premium ILP allows you to make a one-time lump sum investment while regular premium ILP uses the principle of dollar cost averaging – investing a fixed amount of money regularly across a long investment horizon.

Pros and Cons of ILPs

While they offer several advantages, ILPs are more complex than term life insurance. This makes ILPs better suited certain investor profiles than others..

Pros of ILPs

• You have the flexibility to adjust your insurance coverage (for regular premium ILPs)
• More control over how your money is invested

You have the flexibility to adjust your insurance coverage (for regular premium ILPs)

With term and whole life insurance, you cannot choose to lower or raise your insurance coverage after it’s bought. The policy is set at the time that you buy it.

With regular premium ILPs however, it allows you to be flexible on your premiums paid while maintaining the same sum assured.

For example, say you buy your ILP as a young student, when only working part-time jobs. But later, you start working full time, for a company with excellent group insurance; the group insurance also covers most of your life insurance needs.

You can then opt to lower the life insurance coverage provided by your ILP, and shift more of your premiums into wealth accumulation.

These options can be found in policies such as Inspire FlexiSaver and Inspire FlexiProtector. These policies let you increase coverage as you reach different milestones, such as having your first child or buying your first home. You can thus adjust the protection needed at different stages, rather than pay for a fixed level of protection all the way.

More control over how your money is invested

With many insurance products, such as endowment plans or traditional whole life plans, you have no control over where the money goes. With an ILP, you often have fund-switching options.

This means that, if a particular sub-fund is not performing well, you can switch to another to optimise your returns. AXA Wealth Accelerate offers over 90 sub-funds, through which you can easily monitor performance on the fund price tool, and find varied investment options.

Cons of ILPs

• Returns are not guaranteed
• There is a risk that, with age, your units may no longer suffice to cover the fees and policy charges
• May not be ideal for older investors, or investors with a shorter investment horizon
• More complex than simple insurance or endowment

Returns are not guaranteed

The returns from an ILP vary according to market conditions. An ILP may deliver lower returns during economic downturns, but better returns during an economic boom.

Due to the variable returns, ILPs should not be used as the sole investment asset in your portfolio (e.g. you should not put all your available investment funds into a single ILP). ILPs should be complemented by a mix of different investment assets, such as bond funds, fixed deposits, or outright cash savings.

There is a risk that, with age, your units may no longer suffice to cover the fees and policy charges

In an ILP, premiums for the life insurance portion are paid by selling units in the investment portion. However, the cost of insurance will rise with age.

There is a chance, with age, that units in the sub-fund can no longer suffice to pay for the cost of insurance. In this situation, you could choose to lower your insurance coverage or increase your premiums to maintain your life insurance coverage. AXA Wealth Accelerate does offer an added 15 per cent death benefit, and with no COI charge – but do check out the terms and conditions that apply.

If this is a concern for you and you would like to focus on wealth accumulation, you could consider ILPs in the market like AWA which are designed more for wealth accumulation. AXA Wealth Accelerate offers loyalty bonuses of up to 1.1 per cent of your account value after the end of your Minimum Investment Period, and a Power Up Bonus of 1.3 per cent per annum of your account value (from the 15th year of the policy), offsets rising costs besides the COI.

May not be ideal for older investors, or investors with a shorter investment horizon

ILPs are more volatile, and the cost of the insurance component rises with age.

As such, ILPs may not be appropriate for older investors.

For example, if you are already 55, and close to the retirement age of 65, it may not be safe for you to take on the volatility of an ILP – you won’t have sufficient time to recover, if there’s an economic downturn during the last decade of your investment.

This is compounded by the fact that premiums for the life insurance portion will be high, and take up a large portion of your premiums.

More complex than simple insurance or endowment

ILPs are harder to understand than a straightforward life insurance policy, or an endowment plan. In particular, the added layers of complexity come from (1) having to choose the sub-funds, and (2) having to plan for greater variability in the returns.

A Financial Consultant can take you through the product and explain the complexities.

What to look for when choosing sub-funds

The range of sub-funds available in each ILP is different. The Financial Consultant presenting the product can walk you through them, as make recommendations. However, you can follow some general guidelines to make smart picks:

• Pay attention to the risk rating of the sub-fund
• Aim to pick a range of sub-funds with low correlation
• Evaluate the sub-fund’s performance over time

Pay attention to the risk rating of the sub-fund

Each sub-fund will have a risk rating, ranging from low to high. Sub-funds should be chosen in a manner that matches your risk appetite (how well you can accept the risk emotionally), and your risk capacity (your actual financial ability to take on the risk).

A good range of sub-funds will income some low risk, some medium risk, and some high-risk assets. Avoid picking purely high risk, or low risk, sub-funds.

Too many high-risk sub-funds can wipe out a large portion of your investment during a single downturn. Too many low-risk sub-funds can cause your ILP to underperform, and yield lower returns.

(If you want a purely low risk investment, you might want to consider something besides an ILP, such as an endowment plan).

Aim to pick a range of sub-funds with low correlation

Sub-funds can be divided by geographical region, commodity type, or other asset types. Your range of sub-funds should be wide, and have low correlation (low connection) to one another.

For example, say you pick a sub-fund that deals in precious metals, and a sub-fund that focuses on Australia. This is not a very good idea, as Australia is one of the world’s biggest exporter of precious metals – if the value of precious metals falls, both sub-funds might fall in tandem.

While it may look strange to own assets with low correlation (e.g. assets in telcos, and assets in healthcare), this sort of diversification ensures no single event can derail your investment.

Your Financial Consultant can advise you on how to pick a diversified mix of sub-funds.

Evaluate the sub-fund’s performance over time

Avoid taking an episodic view of a sub-fund. For example, if you were to look any sub-fund’s performance between 2008 to 2009, you will see a steep drop due to the Global Financial Crisis.

To get an accurate picture, always check a sub-fund’s performance over a prolonged period, such as 10 years. While past performance does not indicate a repeat performance in the future, it’s needed to give you a more contextualised view.

(To use an analogy: you can’t judge the academic performance of a student from one test result, but from their overall performance over the school year).

What to consider before buying an ILP

ILPs are not “one size fits all” financial solutions; it’s not right for every type of investor.

Before you purchase an ILP, you should take into account the following:

• Is your priority to grow your wealth, or just to get insurance protection? If you’re only interested in protection, simple life insurance may be able to provide equal or better coverage, at a lower cost.
• Do you want to take the time to consider which sub-funds to pick, and when to switch them?
  If you want a completely hands-off investment, you may be better off with simple unit trust or investments like fixed deposits, Singapore Savings Bonds, or endowment plans.
• Can you accept variable returns, rather than an absolute return?
  ILP returns are dependent on market fluctuations and there is no way to guarantee or know the final amount you’ll get. If you prefer a certain level of guarantee in your investments, you may consider endowment plans.

Perhaps the most important aspect to consider, however, is your investment horizon. As stated before, the volatility of ILPs are more likely to afford long term investors, with at least 15 to 20 years to stay invested. Older investors, or those looking for more short-term investments, should speak to their Financial Consultants about alternatives.

Disclaimer:

This article is for general information only and does not take into account the specific investment objectives, financial situation or needs of any particular person. The views expressed herein do not necessarily reflect the views of AXA Insurance Pte Ltd and should not be construed as the provision of advice or making of any recommendation. There is no intention to distribute, or offer to sell, or solicit any offer to purchase any product. We recommend that you seek the advice of a qualified financial advisory professional before making any decision to purchase an insurance or investment product. Whilst we have taken reasonable care to ensure that all information provided was obtained from reliable sources and correct at time of publishing, information may become outdated and opinions may change. We are not liable for any loss that may result from the access or use of the information herein provided.