The Simplest Guide to Investment-Linked Plans (ILPs) in Singapore — for Every Life Stage
Singaporeans have among the longest lifespans in the world, with most of us expected to live past the age of 80. While that’s great news, it also means Singaporeans need to pay close attention to financial planning. While most of us are familiar with concepts such as life insurance, or savings, there is a product that can combine elements of both: that’s the Investment-Linked Plan (ILP).
An ILP differs from some other insurance or savings products; and reading the terms and conditions can be daunting for the first-time buyer. However, ILPs can be a useful financial tool, providing a hybrid form of both insurance and savings. Here’s a rundown on how ILPs work, so you can decide if it’s right for you:
What are Investment-Linked Plans (ILPs)?
An ILP is a hybrid financial product, which combines investment and protection. When you purchase an ILP, your premiums are used to invest in sub-funds chosen.
(These funds are managed by experienced financial professionals, and can focus on different sectors. For example, some of these funds focus on stocks in the US, EU, or other geographic sectors).
Your financial advisor will walk you through these various funds, and you have control over which funds to buy into.
Some (but not all) units in the funds are periodically sold, to pay for your insurance coverage and other costs. When it’s time to claim an insurance pay out, the total payout may be dependent on the policy’s value based on the units in the funds as well as the policy’s sum assured.
In short, the better the funds perform, the higher the potential payouts. On the other hand, the worse the funds perform, the lower the payouts might be.
ILPs may have a cash value when surrendered. If you decide you no longer need the policy, you can surrender the policy, and get cash value based on how well the funds have performed.
However, do consult with your FA before surrendering a policy, as doing so may not be optimal at certain times. There may be a minimum period for which you need to hold the ILP, to accumulate any surrender value.
While there are hundreds of ILPs available in the market, they can broadly be divided into two types: single premium ILPs, and regular premium ILPs.
Types of ILP Premiums
Single premium ILPs
A single-premium ILP means you pay a lump-sum premium, all at one go. This spares you from having to make regular premium payments, such as on a monthly basis.
A single-premium ILP may be preferred by those with variable or unpredictable income, such as business owners or the self-employed. However, it requires a higher initial cash outlay; and single premium ILPs tend to provide lower insurance coverage than regular-premium ILPs.
Regular premium ILPs
This type of ILP is probably more familiar to most Singaporeans. These policies involve regular premium payments, often on a monthly or annual basis. You tend to pay less upfront; and some regular premium ILPs let you adjust the amount of insurance coverage you need (i.e., you can pay lower premiums when you need less coverage, or vice versa).
Why buy ILPs?
- ILPs offer a higher degree of flexibility
- ILPs ensure you’re protected, while you’re investing
- A one-stop product that can help simplify your finances
- Can be useful at every life stage
1. ILPs offer a higher degree of flexibility
Life constantly offers new challenges, and some of these may be difficult to predict. It is, for instance, difficult to estimate how much health coverage we’ll need in 20 or 30 years time. Likewise, we may not know how our financial goals - such as our retirement targets - may change as we age.
Some ILPs also allow you to increase or decrease the amount of insurance coverage you have, based on your needs and lifestyle.
AstraLink, for example, allows you to change, top-up, or withdraw1 your investments as you reach different milestones in life.
Meanwhile, ILPs like Invest Flex offer the option of a premium holiday2 at no charge for up to 120 months from the 5th policy anniversary. This means units in your funds can be sold off to fully pay for your insurance coverage, for a given time. This can be vital during periods such as job loss, as it means you’ll stay protected even when you’re not paying premiums.
If you're looking for flexibility to achieve your investment goals even when life throws you a curveball, Invest Flex Vantage offers the option to receive a potential income stream from the 1st policy year with dividend-paying funds3.
With ILPs, you can change where your money is invested, as financial markets move. This can help to lower risk and optimise your returns; but it’s advisable to pick funds only after consulting with your Financial Advisor.
2. ILPs ensure you’re protected, while you’re investing
Without insurance protection, a single disaster can wipe out decades of financial planning. If you are permanently disabled and can no longer work, how would your family cope with the loss of income?
In some cases, they may be forced to liquidate assets that you’ve spent a lifetime accumulating - such as having to sell off property, or stock portfolios. If this happens during a downturn, it could derail many decades of legacy planning; and leave them much less than you intended.
An ILP ensures that your loved ones have the financial means to cope with such crises, even as it helps to accumulate your wealth. However, note that the degree of protection differs with each ILP - with AstraLink, coverage features a Minimum Protection Value (MVP) of 300 per cent of the sum assured.
3. A one-stop product that can help simplify your finances
ILPs can help to simplify your financial planning.
Otherwise, you may need to spend time tracking how well your Unit Trust funds are doing, how well your Exchange Traded Funds are faring, the recent bonus on your whole life policy…etc.
As hybrid products, ILPs can be helpful if you don’t have the time, or the means, to manage multiple financial assets.
4. Can be useful at every life stage
Because ILPs are so flexible, they can be useful to a wide variety of people in different life stages and financial situations.
For example, young adults who want to start a business can use ILPs, to accumulate wealth while staying insured. For those who do start-up their own ventures, the ability to change coverage amounts - as well as take premium holidays - can be vital in the rocky first years of a new venture.
For Singaporeans in their early 30’s, ILPs can be used to reach targeted amounts - you could aim to accumulate sufficient value to cover the cost of your first flat, or to provide for your first child.
Singaporeans who are focused on a happy retirement can also use ILPs. In these cases, the earlier they start the better: over a long investment horizon, such as 30 or 40 years, they will be able to ride out market fluctuations and see better returns.
Regardless of when you get started, ILPs such as AstraLink and Invest Flex can provide a springboard for your savings. AstraLink offers an investment bonus of up to 67% of your regular premiums paid in the first policy year, while Invest Flex has an investrment bonus of up to 60% of your regular premiums paid in the first policy year.
Drawbacks of ILPs
One of the main drawbacks of ILPs is the lack of guaranteed returns. Because ILPs are tied to investment funds, the performance of these funds is subject to market volatility and investment risks. This means that your returns can fluctuate and, in some cases, you may even incur losses, which can impact your long-term financial goals.
Moreover, ILPs can be complex, with various charges, fund options, and policy details to understand. This complexity can make it challenging for policyholders to fully link how their money is being invested and the potential implications of their choices. Without a clear understanding, it can be difficult to make informed decisions, which is why consulting with a Financial Advisor is crucial.
Comparison with Other Insurance Products
ILPs vs. Whole Life Insurance
Note: There are a wide variety of ILPs and whole life insurance products on the market. Insurers continually innovate to meet customers’ needs, resulting in a highly diversified pool of options. The following is a generalisation only, and there may be specific policies that do not meet these generalisations.
ILPs tend to have the potential - but not the guarantee - of a higher payout than whole life insurance. With ILPs, your premiums are used to buy units in funds (see above); so your eventual payout will vary based on how well the funds perform.
Additionally, whole life insurance tends to be less flexible, and may give you less control. You won’t get to pick funds where your premiums are invested, for example;
It may also not allow you to increase or decrease your insurance coverage after you’ve bought the policy.
ILPs vs. Insurance Savings Plans
Note: As above, there are a wide variety of ILPs and insurance savings products on the market. The following is a generalisation only, and there may be specific policies that are exceptions.
Against an insurance savings plan, ILPs tend to provide higher, non-guaranteed returns based on the funds’ performance. An endowment plan may, for instance, provide a fixed pay out upon a maturity period of 10 or 15 years - you will know exactly how much you’ll get*. With an ILP however, any cash value is dependent on how well your chosen funds perform,
*Some, but not all, endowment plans have a non-guaranteed bonus on top of the specified pay out.
Who Is Suitable For ILPs
ILPs can be an effective financial product for individuals based on their financial goals, risk tolerance, and life stage. They may be suitable for those who are comfortable with investment risks and seek potentially higher returns alongside insurance coverage.
Policyholders looking for ILPs might make the most of these plans by having clear long-term financial goals, such as building wealth for retirement, funding a child's education, or achieving significant financial milestones. Young professionals, business owners, and individuals in their prime earning years might find ILPs beneficial due to their flexibility and potential for growth.
When considering an ILP, the following factors are crucial to evaluate:
- Financial Situation: Assess your current financial stability and ability to handle market fluctuations. Ensure you have sufficient savings and a stable income to support the investment over the long term without affecting your immediate financial needs.
- Risk Appetite: Determine your willingness to accept investment risks. ILPs may be suited for those who can tolerate market volatility and are comfortable with the possibility of fluctuating returns in exchange for potentially higher growth.
- Long-Term Goals: Reflect on your financial objectives and investment horizon. ILPs require a long-term commitment to maximise their benefits. Ensure you have clear goals such as retirement planning or funding education, and are prepared to stay invested through market ups and downs.
Common Misconceptions about ILPs
Misconception 1: ILPs are only investment-focused and lack flexibility
Many believe that ILPs are solely about investment and are too rigid.
In reality, ILPs are insurance plans that offer significant flexibility. You can adjust your coverage to suit your protection needs. For instance, Income Insurance’s Invest Flex allows you the option to withdraw some of your investments at no charge when any specified life event4 occurs during the MIP.
If you're a proactive investor, Income Insurance’s ILPs also enable you to switch funds in response to market conditions and your financial goals, helping you meet both short-term and long-term objectives.
Misconception 2: My money is completely locked in
A common concern is that funds in ILPs are inaccessible. However, many ILPs allow for partial withdrawals as long as a minimum unit value is maintained.
You can also make single-premium top-ups to enhance your investment, and insurers may offer bonuses to boost your growth. This flexibility means you can withdraw funds for major expenses once conditions are favourable, without sacrificing your overall investment strategy. ILPs like Income Insurance’s AstraLink allow the flexibility to change, top up or withdraw1 your investments based on your needs and stages in life.
Misconception 3: ILPs provide minimal insurance benefits
Another misconception is that ILPs offer low insurance benefits. In fact, ILPs are fundamentally insurance plans, and the level of coverage depends on the type of ILP chosen. Protection-focused ILPs allocate more premiums towards insurance, providing robust coverage that can include critical illness riders.
On the other hand, ILPs with a focus on wealth accumulation will have lower insurance benefits, as more premiums are directed towards investments. You can select an ILP that aligns with your needs, ensuring adequate protection or enhanced investment growth.
Should you buy an ILP?
There is no universally correct answer to this question, as everyone’s financial situation and needs are different. In general however, an ILP is best suited to buyers who need flexibility - this can range from young Singaporeans, who face many changes in the years ahead, to those in more volatile professions (e.g., running their own business).
An important consideration is your risk appetite. You should only buy an ILP if you understand the risks involved, and are comfortable with the higher volatility (relative to products such as simple term insurance). As these are all important variables, it’s best to speak to a qualified Financial Advisor, to determine whether an ILP fits into your overall portfolio.
1 Charges may apply, refer to the policy conditions for details.
2 If the policyholder still has not paid the premium after the grace period, the policy will enter into a premium holiday. During this premium holiday, the policyholder can stop paying the premium provided the policy value is able to cover the fees and charges that continue to be due on the policy. The premium holiday charge may be payable during the premium holiday if it is within the MIP. From the 5th policy anniversary, the policyholder can take a premium holiday without any premium holiday charge up to the specified period according to the MIP selected. Please refer to the policy conditions for further details.
3 Dividend refers to the distribution of certain funds that have a distribution option that Income Insurance may declare. The policyholder will be entitled to receive these distributions if the policy has not ended and has units in these funds on the declaration date of the distribution. The distribution amount will depend on the number of units the policyholder holds in these funds on the date Income Insurance declares the distribution. The frequency and/or amount of distributions (if at all) may be varied at Income Insurance's absolute discretion. Distributions are not guaranteed. Income Insurance may or may not pay a distribution every year. If the distribution amount for a fund meets the minimum amount Income Insurance tells the policyholder, the policyholder can choose to receive all future distributions from that fund as payouts.
Distributions may be made out of the income and/or capital of the sub-fund. Any payout of distributions from the capital of the sub-fund may result in an immediate reduction of the net asset value per share/unit. Please refer to the policy conditions for further details on the declaration of distributions, reinvesting distributions, and the applicable terms and conditions.
4 During the MIP, the policyholder may choose to exercise a free partial withdrawal if the insured experiences a life event, subject to the policy’s terms and conditions. Please refer to the policy conditions for further details on the life events and the applicable terms and conditions.
This article is meant purely for informational purposes and should not be relied upon as financial advice. The precise terms, conditions and exclusions of any Income Insurance products mentioned are specified in their respective policy contracts. For customised advice to suit your specific needs, consult an Income Insurance advisor. This advertisement has not been reviewed by the Monetary Authority of Singapore.
These policies are protected under the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC). Coverage for your policy is automatic and no further action is required from you. For more information on the types of benefits that are covered under the scheme as well as the limits of coverage, where applicable, please contact Income Insurance or visit the GIA/LIA or SDIC websites (www.gia.org.sg or www.lia.org.sg or www.sdic.org.sg).
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