Investment-linked policies can be a great way to grow your wealth and provide financial security for the future.
However, with so many options available, it can be overwhelming to choose the right policy for your needs.
Have no fear, because in this post, I will guide you through the process of choosing the best investment-linked policy for you.
By understanding the factors to consider, such as your investment objectives, risk appetite, and policy features, you can make a well-informed choice that suits your needs.
Whether you’re a beginner investor or someone with prior experience, this article will provide you with valuable insights and tips to help you choose the best investment-linked policy that can pave the way to financial success.
Make sure it’s not a traditional whole life investment-linked policy
When exploring Investment-Linked Policies (ILPs), it’s crucial to distinguish between those that are investment-focused and those leaning more toward insurance coverage.
This distinction significantly impacts the policy’s performance and suitability for your financial goals – and we don’t recommend insurance-focused ILPs.
Insurance-focused ILPs, often referred to as traditional or whole life ILPs, primarily emphasise insurance coverage.
They blend investment components with a strong focus on providing life insurance protection.
But how do you identify what is a whole life ILP?
A straightforward approach is to ask your financial advisor (FA) directly on whether the policy recommended is a whole life ILP.
They can clarify the policy’s primary focus and how it aligns with your financial objectives.
Documentation and marketing materials for traditional ILPs often use terms like “whole life investment-linked policy” or you might even find the term “traditional ILP” when researching about the policy.
These terms indicate a stronger emphasis on the insurance aspect, with investment being secondary.
And how do you identify investment-focused ILPs?
On the other hand, investment-focused ILPs are designed for wealth accumulation and are more akin to investment vehicles.
They are often referred to as ‘101-wrapper’.
This term comes from the policy structure where the death benefit is typically 101% of the account value.
This structure indicates that the policy is designed with a priority on investment returns, offering a death benefit that slightly exceeds the investment account value.
To determine if an ILP is investment-focused, just ask your financial advisor if this is a 101-wrapper.
Deciding between an insurance-focused and an investment-focused ILP depends on your individual financial needs and goals.
If your primary objective is wealth accumulation (which it probably is, since you’re reading this post, an investment-focused ILP might be more suitable.
However, if you’re looking for life insurance coverage, perhaps consider a whole life plan or a term life insurance plan instead.
Source of Funds
If you’re inclined to use readily available funds, investing in an ILP with cash is a straightforward option.
Cash investments in ILPs typically offer more flexibility and a wider range of ILPs and funds to select from, making them a suitable choice for investors who prefer more control over their financial commitments.
Alternatively, the Supplementary Retirement Scheme (SRS) offers a tax-advantaged way to save for retirement.
Investing your SRS funds in an ILP can be a strategic move to enhance your retirement savings while optimising tax efficiency.
However, it’s important to be aware of the specific conditions and withdrawal limits associated with your SRS funds.
This option is best suited for you if you already have idle funds in your SRS account.
For those looking to invest with their Central Provident Fund (CPF), certain ILPs are eligible under the CPF Investment Scheme (CPFIS).
This route is particularly appealing if you aim to grow your retirement savings using your CPF funds.
However, investing CPF funds in an ILP requires careful consideration, as your ILPs will need to outperform the risk-free interest rates offered.
For both SRS and CPF funds, there are few ILPs for each, with even fewer funds available. This makes it even more important to compare your alternatives.
Premium Frequency
Different ILPs offer various options for premium payments, including monthly, quarterly, semi-annual, or annual investments.
This flexibility allows you to choose a payment frequency that best matches your income cycle and budgeting habits.
For instance, a monthly payment plan can be more manageable for those who prefer spreading out their financial commitments, aligning with regular monthly income.
On the other hand, annual payments might suit those who receive a yearly bonus and prefer to handle larger financial transactions less frequently.
Some ILPs also offer the option of a single premium investment.
This approach involves making a one-time, lump-sum payment, eliminating the need for ongoing premium payments.
A single premium ILP can be an attractive option for individuals with a significant amount of capital available and who wish to make an upfront investment without recurring payments.
This method is particularly appealing for those looking for a straightforward, one-time financial commitment to their investment needs.
Minimum Premiums
When considering an ILP, it’s essential to factor in the minimum premiums with the policy, especially in relation to the frequency of your payments.
Typically, ILPs start with a minimum investment amount of around $200 to $300 per month.
The amount you’re willing or able to invest, whether monthly, quarterly, semi-annually, or annually, should guide your policy choice.
For instance, if you’re comfortable with investing $200 per month, you should look for ILPs that accommodate this amount as their minimum monthly premium.
This approach ensures that your investment in the ILP is sustainable over the long term and does not strain your financial resources.
This consideration is particularly important for those who are budget-conscious or for whom regular, smaller investments are more feasible than larger, lump-sum payments.
Minimum Investment Periods (MIP)
The MIP is defined as the number of years you are required to invest in the policy before you can withdraw without incurring surrender charges.
Each ILP offers multiple MIP options, and your choice should reflect how long you are willing and able to commit to the investment.
To determine the MIP of an ILP, especially if it’s not explicitly stated, you can refer to the policy’s surrender charge table.
A practical method is to identify the year when the surrender charge drops to 0%.
For instance, if the surrender charge is 0% upon surrender in the 11th year, it implies that the MIP for that policy is 10 years.
This approach provides a clear understanding of the time commitment required for your investment.
Opting for shorter MIPs, such as 10 to 15 years, is often advisable compared to longer periods, like 25 to 30 years.
Shorter MIPs are generally more manageable and align better with specific financial goals and life stages.
They offer greater flexibility and adaptability to changes in your financial situation or investment objectives.
At the end of a 10 or 15-year MIP, you have the option to reassess your financial needs and goals.
If you wish to continue investing, choose another plan that suits your evolving requirements better.
It’s important to align the MIP with your current financial situation and future aspirations, ensuring that your investment journey is both practical and goal-oriented.
Funds Offered
A comprehensive selection of funds can provide the flexibility to tailor your investment portfolio to your specific needs and preferences.
However, the number of funds available should not be the sole criterion for selection.
It is more crucial to whether these funds align with your risk tolerance, investment preferences (such as ESG-focused or halal funds), and their performance history.
Assessing the performance of the funds over a certain number of years is essential in understanding their track record and potential for future returns.
This historical performance can offer insights into how well the funds have navigated different market conditions and can be indicative of the fund managers’ expertise and investment strategies.
Looking at long-term performance is important, as short-term gains can be misleading and may not reflect the fund’s true potential.
Another key aspect to consider is the types of funds offered by the ILP.
Generally, funds can be categorised into retail funds and institutional or accredited investor funds.
Retail funds are accessible to the general public and are designed to cater to a broader investor base.
They often have lower minimum investment requirements and are regulated to ensure a certain degree of transparency and investor protection.
On the other hand, institutional or accredited investor funds are typically available to high-net-worth individuals or institutional investors.
These funds might offer higher risk-reward profiles and could include more sophisticated investment strategies.
There are certain ILPs that offer you the ability to invest in these funds, which is something I consider as one of the main things you should take note.
Investing into Insurer’s Sub-Funds VS Directly into Sub-Funds
Understanding the nature of the funds you are investing in is crucial.
This includes distinguishing between the insurer’s own sub-funds and direct investments into unit trusts.
This distinction is important enough to warrant its own section, as it has significant implications on fees and overall returns.
Insurer’s Sub-Funds
When the funds offered carry the insurer’s name, they are typically the insurer’s sub-funds.
A critical aspect to be aware of with insurer sub-funds is the potential for hidden fees.
It’s not uncommon for insurer sub-funds to exclude fund management fees and sometimes sales charges from the performance returns.
This means that as an investor, you may need to factor these additional costs into your total returns calculations.
However, it’s important to note that not all insurer funds operate this way, so a thorough check is necessary to understand the fee structure and how it impacts your investment.
Direct Funds by Fund Managers
On the other hand, if the investment is directly into a fund managed by a recognised fund manager (like BlackRock or Invesco), the fees are often included in the performance calculations.
This transparency can make it easier for investors to understand their actual returns.
However, even with direct funds, it’s advisable to verify the fee structure to ensure there are no unexpected costs affecting your investment.
Source of Funds
It’s also important to consider that your source of funds might restrict your access to certain types of funds.
For instance, some payment methods may only allow investment in insurer sub-funds.
As a result, understanding the nuances of these funds is even more important.
If you find yourself limited to insurer sub-funds, pay close attention to the fee structure and how it might affect your investment returns.
Investing in Portfolio or Funds?
Another key factor when choosing an ILP is to check if it’s investing via a managed portfolio or if is it a direct investment into the unit trust.
When you invest in a managed portfolio, you’re essentially entrusting the insurance company with the decision-making regarding fund allocation.
These portfolios are curated and managed by the insurer’s investment team, who decide how to distribute investments across various sub-funds.
A key consideration here is the additional layer of fees associated with this service.
Managed portfolios often involve higher fees due to the active management and expertise provided by the insurer.
It’s common for these portfolios to invest in insurer sub-funds, which, as noted earlier, may not always include fund management fees in their performance returns.
Consequently, you could be paying an additional layer of fees, impacting your total investment returns.
Alternatively, investing directly into funds gives you more control over your investment choices.
This option allows you to select specific funds based on your investment goals, risk appetite, and preferences.
Direct investment often involves fewer fees than managed portfolios, as you bypass the costs associated with portfolio management services.
However, this approach requires a more hands-on involvement in managing your ILP and a good understanding of the funds you choose to invest in.
Policy-Level Fees
When evaluating an ILP, it’s crucial to thoroughly understand the policy-level fees, as they will significantly impact your overall investment returns.
These fees are separate from the charges associated with the underlying funds or portfolios and are specific to the management and administration of the policy itself.
Types of Policy-Level Fees
- Frequency and Timing of Charges: Determine whether the policy-level fees are charged monthly or yearly, and whether they are deducted at the start or the end of the period. Fees charged at the beginning of the period can be more costly over time compared to those charged at the end.
- Basis of Fee Calculation: It’s common for fees to be a percentage of the total account value, but in some cases, they might be based on specific accounts within your ILP or on the premiums you pay. Fees calculated on specific accounts or based on premiums generally result in lower overall charges compared to those based on the total account value.
- Fixed Dollar Amount Fees: Some ILPs may include fees charged as a fixed dollar amount, either alone or in addition to percentage-based fees. To understand the impact of these fees, convert the dollar amount to a percentage of your investment amount. This conversion will give you a clearer picture of the actual cost relative to your investment.
Additional Charges for Policy Features
Apart from the basic policy-level fees, be aware of the charges for specific features within your ILP.
These can include partial withdrawal charges, loan charges, premium holiday charges, and others.
Each of these features can incur costs that should be factored into your overall assessment of the policy.
Comprehensive Fee Analysis
When assessing the cost-effectiveness of an ILP, consider all layers of fees:
- Fund-Level Fees: These are charges associated with the management of the underlying funds in which your ILP invests.
- Portfolio-Level Fees: If your ILP involves a managed portfolio, there may be additional fees for this service.
- Policy-Level Fees: These encompass all charges related to the administration and management of your ILP policy.
Bonuses
Bonuses in ILPs are an attractive feature, often used by insurers to entice new customers.
Understanding the nature and impact of these bonuses is crucial for a comprehensive evaluation of an ILP.
Types of Bonuses in ILPs
- Welcome Bonuses: These are typically the largest bonuses offered and are designed to make the investment appear highly profitable in the initial stages. The size of the welcome bonus often correlates with the length of the Minimum Investment Period (MIP); longer MIPs usually mean larger bonuses. For instance, if an ILP offers a 100% welcome bonus and you invest $10,000 in the first year of a 30-year plan, your account value would show $20,000 at the end of the first year. While this doubling of your investment might seem impressive, it’s important to recognise that this increase is primarily due to the welcome bonus.
- Loyalty Bonuses: These bonuses are awarded at various points during the policy term, often after the MIP ends. Loyalty bonuses typically come in the form of additional investment units added to your account and are designed to reward long-term policyholders.
The Impact of Bonuses
While bonuses can be appealing, it’s important to understand their long-term impact.
The initial boost provided by a welcome bonus may diminish over time.
For example, the additional $10,000 from the welcome bonus in a 30-year ILP may seem less significant when spread over a decade or more.
The perceived value of the bonus decreases as the years go by, and it becomes a smaller proportion of the total account value.
Bonuses can also play a significant role in offsetting the overall fees associated with an ILP.
However, quantifying the exact impact of these bonuses on reducing fees can be challenging.
It requires a detailed analysis, often requiring a breakeven table provided by your financial advisor.
This analysis can help you understand when and how the bonuses effectively lower the cost of your investment.
When evaluating ILPs, it’s essential to consider bonuses as part of the overall package, rather than as a standalone benefit.
Be aware that while bonuses can enhance the attractiveness of an ILP, they should not be the sole deciding factor.
It’s important to look beyond the initial appeal of bonuses and assess the ILP based on its long-term investment potential, alignment with your financial goals, and overall cost structure.
Potential Returns
After gaining an understanding of the funds, fees, and bonuses associated with Investment-Linked Policies (ILPs), you can begin to estimate your potential returns.
A practical approach to this estimation involves using a standard rate of return, such as 8% or 10%, and then adjusting for compulsory fees, while disregarding bonuses.
This method provides a solid base for comparing different ILPs.
The S&P 500, known for its annualised return of 8 to 10%, serves as a useful benchmark when estimating potential returns for ILPs.
By using this rate, you can set a realistic expectation for your ILP’s performance.
It’s important to note that this is a general gauge and individual fund performances can vary.
In order to maintain consistency across different ILPs and to focus on the core investment performance, bonuses are excluded from these initial return calculations.
This approach ensures that any additional earnings from bonuses are indeed, a bonus (yay!).
When estimating potential returns, deduct the compulsory fees from your projected rate of return.
These fees, including policy, fund, and portfolio-level charges, can significantly impact your net returns.
By accounting for these fees upfront, you can attain a more accurate estimate of the actual returns you might expect from your ILP.
Once you have calculated your potential returns based on the fees, compare this figure with the historical performance of the fund-level and portfolio-level returns (after taking into consideration its fees).
If the funds have historically performed at or around the 8 to 10% mark, it can be a gauge of their potential future performance.
But always remember that past performance is not an indicator of future performance.
Premium Holidays
Premium holidays are a feature that allows you to temporarily pause premium payments.
However, it’s crucial to understand the specifics of how these premium holidays work and their impact on your investment.
Types of Premium Holidays
- Deduction from Account Value: Some ILPs deduct the premium amount from your account value during the premium holiday. This means that while you are not making out-of-pocket payments, the cost is still being covered by reducing your investment value. It’s important to understand the long-term impact of this on your investment returns.
- Waiver for a Certain Number of Years: Other ILPs may offer a waiver of premiums for a specified period without deducting from your account value. This can be a beneficial feature, but it’s essential to understand the terms and conditions attached.
Check for any charges associated with taking a premium holiday. Some policies may impose fees for this feature, which could affect the overall cost of your ILP.
Additionally, consider how a premium holiday might affect your long-term returns, especially if your account value is being used to cover the premiums.
Be cautious of financial advisors who heavily promote premium holidays as a selling point.
While premium holidays can offer flexibility, they should not be the sole reason to choose a particular ILP.
Some advisors might encourage longer policy terms through selling the unlimited premium holiday feature as a strategy to get you to purchase a longer term policy.
In turn, they earn higher commissions for doing so.
If you’re unsure about your ability to commit to a long-term investment of 20 to 30 years, consider opting for an ILP with a shorter Minimum Investment Period (MIP), even if it means potentially higher fees.
Choosing a policy term you’re comfortable with and can realistically commit to is better.
A shorter MIP can provide more flexibility and may be a more prudent choice if there’s uncertainty about your long-term investment capacity.
Withdrawals
In times of financial uncertainty, the flexibility to make withdrawals from your investment-linked policy can be crucial.
It’s important to understand the policy’s terms regarding partial withdrawals or partial surrenders, as well as any associated charges.
Here are some things to take note of:
- Availability of Partial Withdrawals: Ensure that your ILP allows for partial withdrawals (also known as partial surrender). This feature can provide much-needed liquidity in case of financial emergencies or unexpected needs.
- Minimum Withdrawal Amounts: Check the policy for the minimum amount you can withdraw at a time. This varies across different ILPs and is a critical factor in planning your financial moves.
- Account Balance Requirements: Alongside the minimum withdrawal amount, ILPs usually specify a minimum account balance that must be maintained. This is the amount that needs to remain in your account after any withdrawal. Ensuring that your account balance meets or exceeds this limit is essential to maintain the policy in force.
Be aware of any charges or fees incurred for making a partial withdrawal or surrender. These charges can impact the overall value of your investment and should be factored into your decision-making process.
Understanding these charges upfront can help you assess the cost-effectiveness of making a withdrawal.
Considerations Before Withdrawing
While the option to withdraw can provide flexibility, it’s generally advisable to avoid making withdrawals from an ILP unless absolutely necessary.
Withdrawals can significantly impact the long-term growth potential of your investment, especially if they occur early in the policy term.
Additionally, frequent or large withdrawals can deplete your investment, reducing the effectiveness of your ILP as a tool for long-term financial planning.
Increasing or Decreasing Premiums
Another feature to consider is the flexibility to adjust your premium payments.
Life circumstances can change, and having the option to increase or decrease your premiums can be a significant advantage.
Option to Decrease Premiums: In financially challenging times, you may need to reduce your expenses. Check if your ILP allows you to decrease your premium payments after a certain number of years.
Most policies offer this flexibility, but they might impose an amount that minimally meets the minimum premium requirements of the policy.
So if the policy has a minimum regular premium of $200/month and you’re investing $400/month, you can usually reduce this to $200/month after a certain period of time.
Opportunity to Increase Premiums: Conversely, if your financial situation improves – perhaps due to a pay raise or a new job – you might want to invest more towards your future.
Some ILPs allow you to increase your premium payments, enabling you to enhance your investment and potentially increase the value of your policy.
It’s essential to carefully review the policy terms regarding premium adjustments.
Policies may have specific conditions or timeframes within which you can make these changes.
Additionally, consider any potential charges or administrative fees associated with adjusting your premiums.
Top-Ups
In addition to adjusting premiums, another aspect to consider is the option for top-ups.
Top-ups allow you to invest additional amounts into your policy, which can be particularly useful if you’re unable to increase your regular premiums but wish to invest more.
Regular Top-Ups
- Charges for Top-Ups: Be aware that regular top-ups may come with additional charges, commonly known as premium charges or sales charges.
- Minimum Requirements: If you’re considering making regular top-ups, ensure that the amount meets the policy’s minimum top-up requirements. If the amount you wish to invest is small and meets these requirements, regular top-ups can be a convenient way to increase your investment.
Alternative Options
- Ad-Hoc Top-Ups: Most ILPs also allow for ad-hoc top-ups. This flexibility can be beneficial if you receive unexpected income, such as juicy work bonuses or GST vouchers.
- Taking Up Another Policy: If regular top-ups are not feasible or cost-effective, another option is to take up a new ILP. However, it’s crucial to compare the total costs involved. While a new policy might offer lower fees, it may not provide the same level of liquidity as topping up an existing policy.
Fund Switching
Fund switching in ILPs is a crucial feature that provides flexibility in managing your investment portfolio.
Understanding the terms, fees, and conditions associated with fund switching is essential for effective portfolio management.
Assessing Fund Switching Capabilities
- Switching Flexibility: Determine if your ILP allows you to switch between different funds within the policy. This flexibility is vital for adapting your investment strategy to changing market conditions or personal financial goals.
- Fees for Switching: Investigate any fees associated with fund switching. These fees are usually free, but it’s worth confirming as you or your FA might switch funds frequently over time.
- Minimum Amounts and Balances: Understand the policy’s requirements regarding the minimum amounts needed for switching funds and the minimum balance that must be maintained in the funds you’re moving from. These requirements can influence your ability to manage your investments actively.
Death, TI, and TPD Coverage in Investment-Focused ILPs
While investment-focused investment-linked policies primarily concentrate on wealth accumulation, they also typically include coverage for death, Total and Permanent Disability (TPD), and Terminal Illness (TI) as additional features.
- Death Coverage: In the event of the policyholder’s death, the ILP typically pays out a benefit to the beneficiaries. This amount is usually set at 101% or 105% of either the total premiums paid or the current account value, whichever is higher.
- TI and TPD Coverage: Similar to death coverage, ILPs often provide a benefit in the case of Terminal Illness or Total and Permanent Disability. The coverage amount is generally aligned with the death benefit, offering financial support in these critical situations.
While the primary focus of these ILPs is on investment, the inclusion of death, TI, and TPD coverage adds a layer of financial protection.
This is especially beneficial in the odd chance that you pass on or are diagnosed with TI or TPD during a market crash.
In a scenario like this, if your investments are in a way protected, unlike if you were to invest by yourself.
Availability of Riders
Some policies offer the option to include riders, such as critical illness coverage or various waivers.
While these are not typically a standard part of an ILP, they can be valuable additions for those seeking extra layers of protection.
For instance, a critical illness rider in an ILP provides a financial safety net in the event of a serious health diagnosis, ensuring that you have support when you need it most.
Similarly, waiver riders, like premium waivers, can safeguard your investment by excusing you from continuing premium payments under certain circumstances, such as a disability.
These riders enhance the ILP by merging investment growth potential with a degree of insurance protection, making them a comprehensive financial tool.
However, it’s important to note that adding riders comes with additional costs, and their inclusion should align with your broader financial and insurance needs.
The Financial Advisor
Choosing a competent and reliable financial advisor is crucial when purchasing an investment plan, especially considering that an ILP is a long-term commitment, often spanning 10 to 30 years.
Your financial advisor plays a pivotal role in managing and guiding this investment over its duration.
Experience and Expertise
Ensure that your financial advisor has substantial experience in managing funds.
Ideally, they should be backed by a team of investment analysts who can provide expert advice and insights.
This support system is vital for making informed decisions about your ILP investments.
Regular Updates and Communication
A good financial advisor should commit to providing you with regular updates on your investment.
Whether it’s quarterly, biannually, or yearly, these updates are essential for keeping track of your ILP’s performance and any market changes that might affect your investment.
Your financial goals may evolve over time, and your ILP should adapt accordingly.
A reliable financial advisor will regularly review and rebalance your investments to ensure they continue to align with your changing financial objectives.
This proactive approach is key to maintaining the relevance and effectiveness of your ILP.
Contingency for Advisor Changes
Consider the possibility of your financial advisor changing companies or leaving the industry.
A financial advisor might currently represent Prudential and sold you a Prudential ILP, but he/she might change companies that don’t represent Prudential anymore.
In this case, he/she will not be able to provide you with financial advice and manage your current policy.
They might also decide to leave the industry.
Clarify the process and implications of such changes.
It’s important to understand who will manage your investments if your original advisor is no longer available and how this transition will be handled.
Conclusion
When it comes to investment-linked policies, one size certainly does not fit all.
The nuances in each individual’s financial situation mean that not every policy will be the best fit for everyone.
This is why getting a second opinion on any policy is crucial.
Always consider consulting an unbiased financial advisor if you’re unsure about the suitability of a particular ILP for your unique financial needs and goals.
Remember, the choice of a financial advisor is as crucial as the policy itself.
An ILP is a commitment that spans decades, and you need a reliable professional to manage it effectively.
If your financial advisor changes jobs or leaves the industry, it’s vital to clearly understand who will take over the management of your investments.
I hope this post has been helpful in helping you understand a little bit better on how to choose an ILP!
