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
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 instead of 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.
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.
With ILPs, you can also 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.
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.