1) What is an Investment-Linked Policy (ILP)?
Basically an ILP is a policy that combines term insurance with investment. Essentially ILPs consist of 2 parts:
A) a term insurance portion which gives you the insurance coverage and
B) the investment portion which would give you the investment returns.
There are two important features of ILPs:
A) For the term insurance portion you usually get a smaller sum assured than a 'pure' term insurance. For instance, one particular ILP derived its sum assured based on 4-5 times of the annualized premium. So if you are paying an annual premium of $1,200, then the sum assured will only be $1,200 X 5 = $6,000. Now compare this to a 'pure' term insurance. The same amount of $1,200 per year can get you a 30 year term insurance of (now go ahead, make a guess):
1)$100,000
2)$200,000
3)$300,000
4)$400,000
Have you made your decision? Good, now scroll down. :)
Yes $400,000! I hope you got the right answer. :) So the question is: why pay the same amount to get a fraction - literally 1.5% - of the coverage?
B) Unlike other types of insurance like whole life and endowment, ILPs have two distinct characteristics:
i) High rates of projected returns.
ILPs have higher rate of projected returns that range from 5% - 9%, while the whole life and endowment usually projects between a range of 3.25% - 5.25%.
ii) Do not have any guaranteed return.
ILPs DO NOT have a guaranteed return. Usually the returns for the whole life and endowment policies are broken down into the guaranteed and non-guaranteed portions (for illustrations do refer to my previous post on the term plans). This means that the ILPs do not have any guaranteed returns.
So what are the implications?
The implication for this is that you may get the professed returns on one hand, but on the other hand you might not get anything back (not even the initial amount you put in).
2) How to make sense of the benefit illustration (B.I.)? What do all the columns of confusing figures mean?
You can refer to this useful guide which explains the various columns in details.
4 comments:
hi,
I found your blog while searching on ILPs. I did my due research and asked my Financial planner many questions on ILP and he cant answer it.
Plus, I did a check on 'Pru*' company ILP, and guess what ? More than half of the ILP-linked UTs have negative returns since they were formed...
Seems like too many youngsters have jumped on the bandwagon...
Hi,
Thank you for sharing your insights with me! :) Indeed I feel that a lot of people are interested in ILPs simply because they just want to 'do investment' and ILPs are touted as a possible alternative. Unfortunately I feel that this is the least attractive of all possible 'investment' tools (if it can be considered as one in the first place!) but many of my clients, especially those without any experience in investment, are actually interested in it. I find this worrying and that is why I am sharing my concerns in my blog. I am glad you did you due diligence and it is only prudent that people should find out what they are buying into. If one DOES NOT understand the details, please don't 'invest'.
WHAO!!! Thanks for the insights of ILP didn't know its so bad that required 10yrs(best scenario) and 15yrs(worst scenario) to break even not to mentioned its not guarantee...
Hi NOOB!
Thanks for your comment! If you have any questions about the ILPs do let me know and I'll be glad to help you with them. :)
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