3 major problems with an Investment Linked Plan (ILP)!

An ILP plan is unfortunately one of the earliest plans that a new adviser will be trained when they join the financial planning industy. Me included.

Throughout the years, I've started seeing first hand the disadvantages with these plans. Hence, I do not endorse it today.

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 ILP work?

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.

You can control the death coverage, TPD and CI coverage very easily with the plan. Increasing coverage will require underwriting but decreasing coverage is typically just a form away.

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.

Conclusions

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 have an existing ILP and is unsure whether to cancel it or not, leave your concerns in the comments section below.

Last updated on September 3rd, 2018 at 10:49 pm

Josh Tan Jian Liang (CHFC) Principal Author

REVIEWS: https://www.josh-tan/wall-of-reviews. COMPANY: Promiseland Independent Pte Ltd. EXPERIENCE: 11years.