Last updated on October 24th, 2018 at 03:20 pm
An ILP plan is unfortunately one of the earliest plans that any new adviser will be trained when they join the financial planning industy.Throughout the years, I’ve started seeing first hand the disadvantages with these plans. Hence, I do not endorse it today.
Also, many maternity plans in the market are tied with an investment-linked plan (ILP).
If you are unsure about whether to buy one or if you should cancel your existing plan then this post is for you.
How does an Investment linked plan (ILP) work?
An ILP is an insurance policy that combines life insurance coverage with investments into investment-linked funds.
If you are young, only a small part goes towards the cost of buying the insurance coverage and the remaining will be invested.
But when you get older? … Read on to know some things about the insurance cost.
Some features of the plan
You can control the death coverage, TPD and CI coverage very easily with the plan.
If you want to increase coverage, it will require underwriting
But decreasing coverage is hassle free and typically just a form away.
3 problems with Investment-linked plans (ILP)
Problem 1: Very little is invested in the first 3 years
The diagram above is from moneysense.com which is a good description. Different insurers have different allocation structures but it is roughly the same.
As shown above, the allocation rate for the first 3 years is very little. If you bought this plan with a $2,000 premium each year, by year 3 you would have contributed $6,000 already. However, only $1,700 has been invested due to the allocation rate.
There are also monthly policy fees that are charged on the plan. Usually $5-$10/month.
Problem 2: No one is managing the investment returns
While an ILP typically has free switching of funds facility, it is seldom that portfolio funds are actually switched. At least that is what I hear on the ground.
Most advisers do not look at the investment portion on a regular basis because there isn’t any incentive to do so.
This is unlike a pure investment portfolio where an adviser is paid on an ongoing fee basis.
The range of investment options is poor also with an ILP. Investment linked funds also have high ongoing cost. Hence, there are much better methods than to use an ILP for education planning.
Problem 3: The insurance cost is very expensive when you get old
ILPs have a mortality charge table to show the cost of insurance. In a nut shell, you will see the insurance cost rising every year.
This cost of insurance will become very significant at your age50. At age 60, it becomes unbearably expensive.
It means that if you own ILP then, the plan starts to lose value every year due to insurance cost. That means it cannot provide you permanent long term coverage.
In this aspect, a term plan or a wholelife plan with multiplier effect is a much better solution for buying coverage.
What you should do with an Investment linked plan?
There are some who suggest to cancel the plan immediately.
If you are healthy, then fine, you could cancel with a trip down to the customer service centre or contact your agent.
Then find a new term level term plan.
If not, it may not be the best idea…
Because if you are no longer healthy, you will find it difficult to replace that coverage.
An alternative will be to do a premium holiday.
Simply discontinue the monthly giro.
There would of course still be small policy fees here and there from the plan but at least you still keep the coverage for the next few years (without needing to pay anything).
Question: Josh my plan hasn’t broken even, how?
Even when you cash out, you could still invest it somewhere else and “break-even” somewhere else.
Waiting for it to grow while (problem 2) not having anyone to manage the investments is not the best idea.
Conclusions on ILP
Many are still marketing the ILP. If you are buying a maternity plan today, I suggest buying one that is purely maternity coverage without any ILP.
You may check our post on NTUC Maternity360 plan.
If you want to read other post on this:
Want to read more on insurance planning?
The discovery then was mind blowing to me. In a very quick matter of time, I reorganised my insurance portfolio and that unlocked at least $3,000 in premiums a year.
All this was achieved while maintaining the same level of insurance coverage that I wanted. I channelled all this cashflows as well as new cashflows to my investment portfolio and properties.
I started applying this technique of planning for my clients. It was logical and they appreciated it. Insurance plans need not require a massive lock-in of cashflows