ILPs are not all Horrible: Here’s why [2025] | Dollar Bureau

ILPs are not all Horrible: Here’s why

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ILPs are not all Horrible Here’s why

Thinking about an investment-linked policy (ILP) but unsure if it’s the right fit?

You’re not alone – ILPs sound great on paper, but they can come with a lot of headaches you might not expect.

In this post, you’ll learn:

  • How traditional ILPs actually work
  • The actual costs of ILPs and why they’re often not recommended
  • Better alternatives that let you keep your coverage while growing your wealth

 

If you’re serious about finding an insurance plan that works for you (and not against you), keep reading.

There’s a better way to protect yourself and grow your wealth – let’s dive in!

What is an investment-linked policy (ILP)?

An investment-linked policy (ILP) is a 2-in-1 product that combines life insurance coverage with investment opportunities.

It’s a type of life insurance policy, but unlike traditional policies, it offers you a chance to grow your wealth by investing in selected funds while still providing insurance protection.

When you purchase an ILP, part of the premiums you pay goes towards providing life insurance, ensuring that in the unfortunate event of death or total permanent disability (TPD), there is a payout to your beneficiaries.

The other part of your premiums is used to buy units in investment-linked sub-funds, which are professionally managed and could include asset classes like equities or bonds.

Let’s clarify something first…

There are 2 types of ILPs, and it’s important to understand their differences because there’s a lot of misunderstanding floating around.

The ILP that’s bad in everyone’s eyes (and potentially is)

These are the traditional, insurance-based ILPs, and they’re the ones most people are warned against.

These ILPs mix your insurance needs with your investments.

The more you adjust one portion (insurance or investment), the more the other is affected.

For instance, if you decide you need more life insurance coverage, you’ll reduce the amount of your premiums that go into the investment portion.

In turn, you might lose out on investment growth.

Conversely, if you want to maximise your investments, you could have inadequate insurance coverage.

These traditional ILPs often come with higher charges, including management fees, insurance costs, and other hidden fees.

These fees, including insurance and management charges, can eat into your earnings, making them less appealing than separating insurance and investments.

Additionally, as you age, insurance costs increase, potentially shrinking your investment as units are sold to cover rising charges.

The ILP that everyone thinks is bad (but might not exactly be)

Now, let’s talk about investment-based ILPs, which are often misunderstood.

Think of this version as more of an investment vehicle, with the insurance component playing a minor role.

Usually, the insurance coverage is just 101% of your total premiums.

Everything else is put into the investment portion.

This setup works like a robo-advisor.

You’re primarily investing your money to grow your wealth, and you pay fees to keep those investments going.

Yes, fees are still involved (just like with any investment product), but in this case, the insurance is minimal, and the focus is on generating returns through your investments.

In another post, we’ll dig deeper into why investment-based ILPs aren’t as bad as everyone thinks, and why they might even be a good option in some cases.

But in this post, I’ll talk more about traditional ILPs.

How do traditional ILPs work?

Traditional investment-linked policies (ILPs) are hybrid products that offer you the best of both worlds: life insurance coverage and investment opportunities.

When you pay your premiums, part of the money covers your life insurance.

This provides financial protection for life events like death, total and permanent disability (TPD), and in some cases, even early critical illness (ECI) or critical illness (CI).

The other part of your premiums is used to buy units in various investment-linked sub-funds, usually managed by professional fund managers.

The returns you’ll get depend entirely on the performance of the investment funds you’ve selected.

So, if the market is doing well, your investments might grow nicely.

But if the market tanks, you could be left with little to no returns – or worse, a loss.

It’s a gamble, and that’s why traditional ILPs are often considered riskier than other types of insurance products.

What’s the difference between traditional ILPs and whole life insurance plans?

The key difference lies in how they manage the insurance and investment components.

With a whole life insurance plan, you’re paying fixed premiums to secure lifelong insurance coverage while part of the premiums goes into investing in the participating fund.

These plans often come with a guaranteed payout (or sum assured) and may accumulate a cash value over time through non-guaranteed bonuses.

You don’t have to worry about where the money is going; your premiums are focused on providing life protection, and any cash value you build is more of a bonus.

The difference is that the portion that goes into insurance and the par fund is fixed.

While this may sound less ideal than an ILP, it levels out your cost of insurance right from the start.

Benefits of traditional ILPs

Ability to adjust insurance coverage

One of the biggest selling points of traditional ILPs is flexibility.

You can adjust your insurance coverage depending on your life stage.

If you’re younger and want to focus on growing your wealth, you can reduce your coverage and direct more of your premiums toward investments.

As you age, you can shift the balance, increasing your coverage when you have a family or financial dependents to protect.

This flexibility allows you to customise your plan to fit your evolving needs, unlike whole life insurance plans where the coverage is typically fixed from the start.

Stay protected while investing

Traditional ILPs let you kill 2 birds with one stone: you stay protected with life insurance coverage while investing for potential returns.

For those who like the idea of getting more out of their insurance premiums, this is an attractive option.

It’s a way to stay insured without feeling like your money is being “wasted” on just insurance.

Your account value can be used for retirement or even to pay for itself

If your investments perform well, you could use the funds to supplement your retirement savings.

This dual-purpose approach is why some people find ILPs appealing, as they offer a mix of wealth accumulation and protection.

The “self-paying” policy pitch

Traditional ILPs are often sold with the idea that, over time, your policy will pay for itself.

As your investments grow and accumulate value, the gains can be used to cover your premiums as you age.

The concept sounds appealing – your investments fund your policy in the long run, and you don’t have to worry about paying premiums out of pocket when you’re older.

It’s a hands-off approach, and many find this aspect particularly attractive.

But this only works if your investments perform well enough to cover those costs (after the ILPs’ fees), and there’s no guarantee they will.

Market downturns or poor fund performance could leave you with less value than expected, meaning you might still have to pay premiums later.

Reasons NOT to buy traditional ILPs

High fees

ILPs often come with a variety of charges, including insurance charges, fund management fees, policy administration fees, and sales charges.

These fees quickly add up and can significantly reduce the value of your investment over time.

Even if your investment performs well, these ongoing costs can eat into your returns, leaving you with less than expected.

In comparison, if you separate your life insurance from your investments, you could opt for lower-cost investment products like ETFs or robo-advisors, which generally charge much lower fees than ILP sub-funds.

So, you end up paying a premium for the convenience of combining your insurance and investments in one product.

Sub-fund returns are not guaranteed

The investment portion of a traditional ILP depends entirely on the performance of the sub-funds you choose.

And here’s the catch: returns are not guaranteed.

While you might have some good years when the market is performing well, you’re just as likely to face poor years with minimal or negative returns.

The market’s volatility can have a direct impact on your investment, and there’s no safety net to cushion you against downturns.

ILP sub-funds have an additional layer of fees that eat into your returns

These fund management fees are charged by the managers who oversee your investments, and they can quietly erode your returns over time.

Even if the market is performing well, these fees can eat away at the growth of your investments, leaving you with a much smaller payout than you might expect.

For example, while the sub-fund might show a return of 5% to 8%, once you account for the fees (which can range from 1-2% or more), your actual returns could be significantly lower.

And this fee is only at the fund-level without taking into account the actual policy fees.

This makes it harder to see any real growth in your investment, and for many, it simply doesn’t justify the risk and cost involved.

Investments may not keep up with rising insurance costs (biggest reason not too)

This is, without a doubt, the #1 reason why traditional ILPs are often discouraged.

Even I don’t recommend them, and here’s why:

As you grow older, your insurance costs rise.

That’s just the nature of life insurance – insuring an older person is riskier, so the premiums go up.

In a traditional ILP, the insurance portion is paid for by selling off units from your investment.

This might be fine when the market is doing well, and your investment is growing.

But what happens when the market takes a hit, or your account value isn’t strong enough?

You’re left with 2 options: top up with additional premiums to keep your insurance coverage intact, or risk losing essential coverage altogether.

Nearing retirement, the last thing you want is to be in a constant state of stress, worrying about paying extra premiums just to keep your policy afloat.

However, with a traditional ILP, this can become a nightmare scenario.

At old age, if you surrender this policy due to unsustainable premiums (or for any reason), you might not qualify for a traditional insurance plan due to pre-existing conditions, or the price might be way too expensive (a very common problem faced by our readers).

If you maintain your policy, your retirement funds are further diminished

Every time the insurance premiums rise, more investment units are sold to cover the cost, which means your hard-earned savings are gradually diminished.

Over time, you’ll have less for retirement, leaving you with a smaller financial cushion to fall back on during your golden years.

If you don’t have any other sources of investments or savings, this could lead to serious financial struggles later on.

Who should get traditional ILPs?

Honestly, no one.

I strongly recommend against getting traditional ILPs because the headaches and risks far outweigh any potential benefits.

A term life plan is much cheaper, and you can invest the rest.

You’ll get the coverage you need without the inflated fees, and the premiums from term plans will be much lower.

With the money you save on insurance, you can invest the rest in other, more reliable investment products like ETFs, unit trusts, or even robo-advisors.

This way, you have full control over your investments and won’t have to deal with the complex structure and rising costs of an ILP.

If you’re risk-averse, a whole life plan is still cheaper without the headaches of an ILP

While it may be more expensive than term life insurance, it’s far cheaper and more predictable than a traditional ILP.

You get lifelong coverage and the potential for some cash value growth through guaranteed bonuses, but without the uncertainty and fees that come with ILP investments.

Again, you can take the money you save from not having an ILP and invest it in safer, more transparent investment options.

But my FA said this:

I’ve been getting high returns and will continuously get high returns for you

If your FA promises high returns, it’s crucial to dig a little deeper and understand precisely what those returns look like after all the fees.

Here’s what you should ask your FA:

  1. Policy-level fee: These are the costs directly associated with maintaining the ILP itself, including administration fees, insurance charges, and other policy-related costs.
  2. Portfolio-level fee: This includes charges related to the overall management of the ILP portfolio, such as fund switching fees and advisory fees.
  3. Sub-fund level fee: These fees are charged by the fund managers who handle the sub-funds in which your premiums are invested. They can include management fees, sales charges, and other costs that come directly out of your investment returns.

 

After calculating the total costs, you’ll probably realise that there are better returns elsewhere – such as through direct investments in ETFs, mutual funds, or other low-cost investment products.

You can adjust coverage, saving you more money in the future

But there are more straightforward, more cost-effective ways to manage your insurance needs without the high fees and complexity of an ILP.

You can always start with a base term life plan for core coverage.

When you have higher liabilities – like a mortgage or children to support – you can add a renewable term plan to boost your coverage.

The beauty of this is that you can renew the additional term plan if you still need it after your initial term expires.

When your liabilities decrease, such as when your mortgage is paid off, or your children become financially independent, you can surrender the renewable plan.

This allows you to avoid paying for coverage you no longer need, giving you flexibility without locking you into a costly ILP.

Another option is a whole life plan with a multiplier.

With this, you get higher coverage during the critical years when you need it most, but the multiplier expires at a set age, usually when your liabilities decrease.

This way, you’re not stuck paying for excess coverage in your later years, allowing you to keep your insurance costs in check while still having adequate protection when needed.

You can gift this to your family when you pass away

There’s a more efficient and cost-effective way to achieve the same goal without the complexity and fees of an ILP.

By opting for simpler, cheaper insurance options like a term life plan or a whole life plan with a multiplier, you save significant money in premiums.

Instead of paying high fees for a traditional ILP, you can take the money you’ve saved and invest it in more cost-effective vehicles.

Over time, these investments can grow substantially, and when appropriately structured, they can offer even better returns than the investment portion of an ILP.

You can also ensure that your family receives this money in a smooth, planned manner by writing a will or setting up a trust.

Both options give you full control over how your assets are distributed after your passing.

Conclusion

To wrap things up, traditional ILPs might seem like a tempting option, but they come with many drawbacks – high fees, unpredictable investment returns, and rising insurance costs that could leave you in a bind later in life.

We’ve explored how these policies work, why they’re often not recommended, and smarter alternatives like term or whole life plans that save you money while giving you the flexibility to invest the rest.

Whether it’s managing your coverage or gifting money to your family, there are far better ways to achieve your financial goals without the complications of an ILP.

Still feeling unsure about the best option for your situation?

You don’t have to figure it out alone.

If you’re confused or have any questions, feel free to chat with one of our trusted financial advisor partners – they’ll give you unbiased advice at no cost.

It’s a great way to get clarity and make an informed decision!

References

Picture of Firdaus Syazwani
Firdaus Syazwani
In 1999, Firdaus's mother bought an endowment plan from an insurance agent to gift him $20,000. However, after 20 years of paying premiums, Firdaus discovered that the policy was actually a whole life plan with a sum assured of $20,000, and they didn't receive any money back. This experience inspired Firdaus to create dollarbureau.com, so that others won't face the same problem of being misled or not understanding what they are purchasing – which he sees as a is a huge problem in the industry.

Disclaimer: Each article written obtained its information from reliable sources and should be purely used for informational purposes only. The information provided by Dollar Bureau and its affiliated parties is not meant to be construed as financial advice. Dollar Bureau shall not be held liable for any inaccuracies, mistakes, omissions, and losses incurred should you act upon any information listed on this website. We recommend readers to seek financial planning advice from qualified financial advisors. 

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