It’s occurred to me that I’ve never written about Investment-Linked Policies (ILPs) on Financial Horse before.
Whether rightly or wrongly, there’s quite a lot of negative perception around ILPs in the market.
But as investors, it’s wise to consider all investment options.
So when Manulife reached out to me, I was interested to delve further into the issue.
Understand the product, think critically from first principles, and form your own opinion.
Note: This post is sponsored by Manulife Singapore. All views and opinions are from Financial Horse.
Basics: What is an Investment Linked Policy (ILP)?
MoneySense (a Singapore government site) has a great definition of Investment-Linked Policies:
Investment-linked policies (ILPs) are policies that have life insurance coverage and investment components.
Your premiums are used to pay for units in one or more funds of your choice. Some of the units purchased are then sold to pay for insurance and other charges, while the rest remain invested.
ILPs provide insurance protection in the event of death or if included, total and permanent disability (TPD) and/or terminal illness (TI) too. Depending on the policy, the death, TPD and/or TI benefit may comprise the higher of the sum assured or the value of the units in the funds at that point in time or some combination of the two.
The value of these units depends on their price, which in turn depends on the fund’s performance. This is why ILPs usually do not have any guaranteed cash values.
Basically, an ILP is a policy that combines life insurance, with an investment component.
The policy will provide insurance in the event of death, TPD and/or TI, based on the plan you selected.
At the same time, the premiums will be invested into an investment fund, to generate investment potential returns.
Why the fear of ILPs?
It’s worth talking about why there is so much fear surrounding ILPs.
The 3 biggest points I’ve identified are:
- Investment Returns
- “Lock-in” period
- Investment Fees
(1 + 2) Investment Returns + Lock-in?
We all know the story.
Everybody has that one friend who bought an ILP 10 years ago with a projected return of 5%.
But 10 years on, the actual returns are much lower than expected, and he cannot exit his ILP without paying a penalty. Furthermore, there are no guaranteed cash values.
In the past, ILPs also deduct considerable charges upfront from the premiums at the initial years, resulting in less amount being invested upfront – with big impact on the long-term compounding of investment returns.
I do agree these are legitimate concerns.
But it’s worth understanding a bit more about why this is the case.
Investment Returns are not guaranteed
With an ILP, the investment monies are routed into a fund manager, who then invests the money for you.
With most ILPs these days, you can select the exact Fund you want to invest with.
This means you have some measure of control.
That said, the investment returns are not guaranteed.
The investment returns you get, will depend much on (1) market conditions, and (2) the skill of the fund manager.
So to be really fair to ILPs, the underperformance is not necessarily the fault of ILPs.
Had you invested in the same fund by yourself, you would be looking at similar underperformance.
Minimum investment period
For some ILPs, when you sign up, you are required to select a “Minimum Investment Period”.
You can think of this as a lock-in period.
If you exit within the Minimum Investment Period, there is a fee payable.
Because of this, it would be wise to think properly about how long you can accept your funds being locked up, before signing up for such an ILP.
That said, it may not be easy to forecast your exact money needs and life goals over the next 10 – 20 years when signing up for such an ILP.
So a little bit of projection is required here.
Can a minimum investment period be a good thing?
Of course, you can also argue that a Minimum Investment Period might be good for certain investors.
It forces you to adopt a disciplined approach on regular investment over a longer investment horizon instead of trying to time the market, and you can also avoid panic selling into a market drop.
So it depends on the kind of investor you are.
Insurance + Investments
Another point to note is that ILPs by their very nature tie insurance and investment together.
The con with this, is that if you want to exit your investment, you are exiting your insurance as well.
That said, ILPs typically bundle a minimal death benefit, so the primary objective is usually investment and not insurance.
If you’re concerned about legacy planning though, you can choose to add the right types of life insurance products as a safety net, so that your loved ones are protected from financial instability should the worst happen to you.
For example, with Manulife InvestReady (III), the death benefit payable is 101% of total premium paid1, or the account value, whichever is higher.
The concern here, is that with ILPs you will need to pay management fees to the fund manager, which reduces potential investment returns.
It’s a legitimate concern, but the same could be said of any managed investment product.
With any managed investment product, fees will always be higher than a pure passive approach.
Whether passive or active investing is superior is probably beyond the scope of this article, but the fact is that active investing carries with it additional fees.
If you access the same fund via your bank or online platform (eg. FSMOne), chances are you would be looking at similar fees.
An alternative is to access some of these funds via a Fintech like Endowus, which rebates the trailer fees to you such that you enjoy a lower all-in fee.
But to be really objective, with platforms like Endowus, you’re also paying a platform fee of up to 0.6% per annum. This option also requires you to know a bit more about what you’re doing, as you’re free to panic sell into a market crash (with much less hand holding).
So it does boil down to what kind of investor you are.
Can ILPs be a good investment – What is your alternative investment?
On the flipside, can ILPs be a good investment?
My personal view – ultimately, it comes down to what is your alternative.
If you don’t invest in the ILP, where would your money go?
And in many ways, this goes back to the kind of investor you are.
How an ILP can work for you
There are several ways that an ILP can fit into your portfolio.
Manulife’s ILP – Manulife InvestReady (III) – has great flexibilities, allowing you to choose what works for you.
Investors can choose from a selection of professionally managed funds according to your preferences and risk appetite.
You can also enjoy unlimited free fund switches so that you can adapt to changing market conditions.
With the extensive range of funds, you can build a diversified portfolio to achieve your financial goals.
For instance, you can pick dividend-paying funds to enjoy potential regular dividend payouts as income while also getting protection coverage against death and terminal illness.
You can opt to reinvest the potential dividend payouts back into the funds. You also have the flexibility to withdraw the reinvested dividends anytime without charges.
Depending on your age group, time horizon and budget, you can select the appropriate minimum investment period and premium that suits your circumstances.
You are also able to follow-up with your Financial Consultant any time on how your ILP is working for you.
Explore the many ways in which you can incorporate Manulife InvestReady (III) in your portfolio here.
Do ILPs have a place in my investment portfolio?
Now to answer this question – it goes back to what kind of investor you are.
I love investing.
I spend most of my waking hours reading up on financial markets and monitoring financial markets.
I have a long-term passive portfolio I do not touch (mix of ETFs and individual counters), but I also have an active portfolio that I trade actively.
I like the full control over my investment portfolio, to rotate in and out of asset classes as I deem fit.
But… Each Investor is unique… decide what works for you
That said, my personal situation cannot be generalised for all investors.
Everyone’s priorities are different, and in different stages of life.
For investors who do not want to spend time fussing about their investment portfolio or keeping up with financial markets.
For investors who appreciate having an investment advisor to guide them through periods of market volatility.
ILPs can be a tool you at least consider, when evaluating your investment options.
If you’re deciding between buying a diversified S&P500 Index fund, an actively managed fund, or an ILP, it could help to speak a Financial Consultant just to understand more on whether ILPs could work for you.
It doesn’t have to be all or nothing.
Investing wisely means you have a diversified portfolio.
You can decide for yourself how you allocate your funds.
Like I said at the beginning, understand the product, think critically from first principles, and form your own opinion.
Find out whether an ILP is suitable for you here.
Manulife InvestReady (III)
If you’re interested in exploring whether ILPs have a place in your portfolio, you can check out what Manulife has to offer.
Manulife InvestReady (III) gives you coverage2 against death and terminal illness at a higher of 101% of your total premiums paid1 or account value, while your basic premiums will be invested into funds.
You can access over 100 funds, including dividend-paying funds.
There are also extra benefits, such as a welcome bonus, annual premium bonus3, and yearly loyalty bonus4.
How to find out more?
If you are interested in Manulife InvestReady (III), you can approach any Manulife Financial Consultant or their appointed distributors.
Click here for more details!
Note: This post is sponsored by Manulife Singapore. All views and opinions are from Financial Horse.
Disclaimers/ Important Notes
- Total premiums paid include total basic premiums paid plus any top-up premium, less any withdrawals.
- Coverage against death and terminal illness up to policy anniversary immediately after the 99th birthday of the life insured. Terms and conditions apply. Please refer to Product Summary for more information.
- A one-time Annual Premium Bonus will be given if the first premiums is paid via annual premium payment mode. If there is any change in mode of premium payment from annual to non-annual during the policy term, the Annual Premium Bonus will be deducted from the account value.
- Loyalty Bonuses vary in accordance with the MIP selected. Terms and conditions apply. Please refer to Product Summary for more information.
Manulife InvestReady (III) and its supplementary benefits are underwritten by Manulife (Singapore) Pte. Ltd. (Reg. No. 198002116D). This advertisement has not been reviewed by the Monetary Authority of Singapore. Buying a life insurance policy is a long-term commitment. There may be high costs involved if you terminate the policy early, and your policy’s surrender value (if any) may be zero or less than the total premiums paid. Your investments are subject to investment risks, and you may lose the principal amount invested. The performance of the InvestReady Fund(s) is not guaranteed. The unit prices and any income accruing to it may fall as well as rise. The Fund Managers shall have the absolute discretion to determine whether a distribution is to be made in respect of the InvestReady Fund(s) as well as the rate and frequency of distributions to be made. The intention of the Fund Managers to make the distribution and the distribution yield for the InvestReady Fund(s) is not guaranteed, and the Fund Managers may review the distribution policy depending on prevailing market conditions. Distributions may be made out of income, net capital gains and/or capital. Past distribution yields and payments are not necessarily indicative of future distribution yields and payments. Any payment of distributions by the InvestReady Fund(s) may result in an immediate decrease in the net asset value per unit. You should read the prospectus and the product highlights sheet and seek financial advice before deciding whether to purchase units in the InvestReady Fund(s). A copy of the prospectus and the product highlights sheet can be obtained from a Manulife Financial Consultant or its Appointed Distributors. This material is for your information only and does not consider your specific investment objectives, financial situation or needs. It is not a contract of insurance and is not intended as an offer or recommendation to purchase the plan. You can find the full terms and conditions, details, and exclusions for the mentioned insurance product(s) in the policy contract.
This policy is 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 us or visit the LIA or SDIC websites (www.lia.org.sg or www.sdic.org.sg).
We recommend that you seek advice from a Manulife Financial Consultant or their Appointed Distributors before making a commitment to purchase a policy.
Information is correct as at 17102022.