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Should Singaporeans Go For Investment-linked Products?
Investment-linked products (ILP) often form part of the insurance suite of products financial advisors market to individuals. While some of us may not be financially-savvy enough to invest on our own, does buying ILPs ensure we get the returns we expect from investing?
What Is An Investment-linked Product?
ILP is a hybrid insurance policy that combines investment and protection into a single product. The premiums you pay provide you not only with insurance coverage but part of the premium will be used to buy units in a specific investment fund of your choice.
This feature is seen as attractive by many as it kills two birds with one stone - building insurance cover and simultaneously allowing one to dabble in some passive investments.
There are two main types of ILPs: Single premium and Regular premium.
The single premium ILP allows you to use funds from your CPF but you must pay a lump-sum to purchase units.
This amount of money, after deducting administrative charges for insurance protection, is then invested in buying units of a fund. Most financial service providers also allow you to top-up additional premiums to increase your investment exposure under this ILP by buying more units.
On the other hand, regular premium ILPs use a part of your monthly premium to make purchase of units of investments to build up your portfolio. This allows you to choose how much the percentage of your premium goes into insurance coverage, and how much goes into investment.
The proportion used is commonly known as the allocation rate and is stated in the product summary.
For most single premium policies and top-ups, 100% of your premium is used to purchase units. For regular premium policies, the amount of premium used will depend on whether it has a 'front-end' or 'back-end' loading.
In a front-end loaded policy, most of the premiums will pay for the insurer’s expenses including distribution and administration costs in the early years. The remainder pays for units.
This is also the main reason why savvy investors caution against buying into such products, as most of the money you pay go to the insurers first.
Regular premium ILPs appear to offer the best of both worlds, but there is a major downside to it – the policyholder undertakes the risks of the performance of the funds you chose to invest in and returns on investments are not guaranteed.
It also does not carry a minimum cash value like endowment or term life insurance.
As with all investments, markets trade in cycles and there is usually an administrative cost involved should you decide to switch funds.
The investment-savvy will probably tell you to stay away from ILPs at all cost, but the advantage of cheaper insurance coverage compared to term insurance may attract the young who are just starting out.
As with all other investments, take note of the charges involved, the percentage allocated towards investment and insurance and most importantly, choose a good financial advisor who will take you through the fine print!
This article was originally on the GET.com blog at: Should Singaporeans Go For Investment-linked Products?.
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