In the first of a three-part collaboration series between Singlife and CNA938, Jovan Suen, Lead for Investment at Singlife Financial Advisers, went on the radio station’s Dollars and Sense show to speak on the Myths Versus Facts about Investment-linked Policies (ILPs). He answered common questions about the hybrid insurance policies with insurance and investment components. What do you need to know about ILPs today? How can they work to help grow your wealth? What are some of the risks of ILPs and is everything you’ve heard or read about them true?
Here’s a recap of the interview:
CNA938: What are investment-linked policies or ILPs?
Jovan Suen (JS): As the name suggests, an investment-linked policy or ILP refers to an insurance policy that’s linked to investment. This means that premiums that are paid are invested into the available ILP sub-funds selected by the consumer to achieve higher potential returns as compared to traditional insurance policies where the investment breakdown is determined by the insurer. What this generally means is that you as a consumer have greater ownership over how you wish to invest your money while enjoying insurance coverage at the same time.
CNA938: Why should ILPs be considered? A policyholder can have separate investment and insurance and policies, and some people think that could be safer than lumping them both together. What are your thoughts on this?
JS: I guess you’re referring to the common saying, “buy term and invest the rest”. What this typically suggests is for one to only buy pure term insurance which does not have any form of investment or savings element, and to invest your remaining available monies into pure investment assets such as stock options, property and so on. The idea behind this is to keep your investment and insurance separate, so as to minimise the insurance costs and maximise investment returns.
While this sounds good in theory, many consumers find investing on their own daunting and frequently do not know where to start. Also, many may not have the time or know-how to monitor their own investments.
This is where ILPs fill the gap. There are benefits to ILPs which seek to combine the best of both worlds. One key benefit of ILPs is that they provide coverage upon death and depending on the ILP plan, there may also be terminal illness and critical illness coverage if the consumer has chosen to add these riders on top of the main plan.
If the market is performing spectacularly, you will get to enjoy the full upside. Various ILPs such as Singlife Savvy Invest also have other features and benefits which traditional term and/or vanilla investment assets do not have.
"ILPs have more dynamic features like Life Stage benefits. So, if you’re married and have a newborn, you’ll be able to transfer the plan to your child."
CNA938: Knowledge is vital. Let’s continue to get clarity on some other aspects concerning ILPs that might have been misinterpreted over time.
JS: One of the common misinterpretations is that ILPs invest into very expensive feeder funds. However, this no longer holds true as nowadays ILPs invest into sub-funds directly. ILPs used to be known to be costly, and there are ILPs where not 100% of your premiums are invested and these ILPs have gained a bad reputation over the years. They are often associated with high fees and hidden charges. Hence, many still believe that the first portion of premiums paid are often channelled towards covering costs and not being used for investment. But with the new ILPs out in the market now, this is no longer true, so this is where many still have the same old thinking.
CNA938: Some people also think that they’re a whole lot more expensive. How untrue is that?
JS: With the new ILPs, premiums are fully invested in contrast to old plans, but the myth is always there so there’s always this thinking in the market that it’s the most expensive plan.
CNA938: I’ve also heard that the premiums get more expensive as you get older. Has this been misrepresented as well?
JS: Yes, this is how the old plans were designed.
CNA938: We’ve often heard that coverage and investment should not be lumped together but there are new plans now and things have changed. How would you advise people who continue to think that their coverage and investment portfolio should not be lumped together?
JS: Right now, based on the markets, it really depends on the individual because ILPs have more dynamic features like Life Stage benefits. So, if you’re married and have a newborn, you’ll be able to transfer the plan to your child. With time in the market, with a long time horizon, you’ll be able to ride out the volatility. Similar to any life insurance plan, ILPs offer riders that can be added on so the flexibility of adding, for example, a rider to waive payer premium in the unfortunate event of one’s death actually benefits the family as well.
CNA938: What factors favour investing in ILPs?
JS: There are two types of ILPs: single-premium and regular-premium ILPs. The primary difference between the two is timing the market (single-premium ILPs) versus dollar-cost averaging (regular-premium ILPs). Dollar-cost averaging is a good strategy for investors with low risk tolerance as putting a lump sum of money into the market can be very unsettling especially when markets fall. With market uncertainties due to the current Russia-Ukraine war, dollar-cost averaging through ILPs actually helps customers stay disciplined enough to be invested in the market.
CNA938: You talked about the differences between single-premium ILPs and regular-premium ILPs. How do I know what’s right for me?
JS: There isn’t a right or wrong answer. It’s more about what the client wants. It’s very intimidating to be investing a single lump sum right now, looking at how the market has been dropping daily. So, taking the dollar-cost averaging approach through regular-premium ILPs helps to mitigate the fear of investing by smoothening potential volatility and limiting losses because of an ill-timed investment. On the other hand, investing a lump sum into an ILP means financially, you may be locked in for a long time.
"ILPs are meant to be mid- to long-term investments. A longer time horizon helps to mitigate the risk of any investment plan."
CNA938: What are the risks about ILPs we ought to recognise?
JS: With the ongoing Russia-Ukraine war, the most important thing for investors now is not to try to time the market. We need to recognise and accept that market volatility will always be there so ILPs will be subjected to investment risk. However, ILPs are meant to be mid- to long-term and a longer time horizon actually helps to mitigate the risk of any investment plan.
CNA938: Do I need to review my portfolio midway through and then assess the risks at that point?
JS: Definitely, and this is where ILPs give consumers the flexibility to choose the funds they want. There are always gaps in the markets – if you feel the US is on the high side, you may start looking at Asian markets and say it’s time for you to switch from a high valuation in the US and buy into Asia.
CNA938: Which demographic profile would be best placed to consider ILPs, given their stage of life and their present and future financial aspirations or obligations?
JS: Like any insurance plan, ILPs can be bought under a needs-based situation, which may occur at any life stage. So, if you are married and have a newborn, you might want to buy it. When your child grows up, you can choose to transfer the plan to your child. Or, if you have a teenaged child, you might want to hold on to the plan for a longer term so you can leave a legacy for your family.
So, an ILP could be useful at any life stage, much like any financial planning tool.
CNA938: Signing up for a conventional ILP could be a cumbersome process because you have to make an appointment with an agent, but technology does remove some of that trepidation. How has the move towards digital taken away this inconvenience of ILP application and given customers more flexibility?
JS: With the Covid situation and over two years of embracing digitalisation, the traditional sales advisory process has evolved quite a bit. Whereas previously we used to have face-to-face meet-ups with a client, we now no longer need to do that. Everything we need to do can be done online. For a more complex product like ILPs, the flexibility of having digital meetings with clients, i.e. non face-to-face, makes it easy for clients to meet their agents. We could have a call on video conferencing platforms like Zoom or Microsoft Teams. The entire sales process can be completed online with such virtual meetings, digital tools like electronic signatures, and so on.
CNA938: Any words of advice or caution for customers considering ILPs?
JS: Like buying any life insurance policy, buying an ILP is a long-term commitment. It is very important that you fully understand the product you’re buying. Most importantly, it should meet your needs and you should be able to keep up with the premium payments. When in doubt, you should always speak to your trusted financial adviser and if you do not have one, you’re welcome to give us a call.