ILPs and Escalating Insurance Charges
I have a handful of clients whom have bought regular premium Investment-Linked Insurance Policies (ILPs). All of them are unaware of the escalating insurance (or mortality) charges as they have never been informed of these charges when they were sold the plans. So, you can imagine the disbelief on their faces when I explain to them the impact of charges and how investment returns will be depleted to fund the exorbitant premiums at older ages.
Here’s an example of how insurance charges are calculated:
Basic policy: $150,000 covering Death, Terminal Illness (TI) and Total and Permanent Disability (TPD). Upon Death, TI or TPD, the payout is $150,000 plus market value of the unit trusts.
Rider: A Critical Illness Rider is also attached and will accelerate a payout of $150,000.
Cost of insurance or generally referred to as mortality charges (yearly renewable term basis):
- The monthly mortality charges covering Death and TI at age 80 is $4.325 per $1,000 sum at risk (stated in the charges table in the benefit illustration)
- The monthly insurances charges covering Critical Illness at age 80 is $5.250 per $1,000 sum at risk (stated in the charges table in the benefit illustration)
- The ILP charges per month at age 80 is = 4.325 x 150,000/1000 + 5.250 x 150,000/1000 = $1,436.25!
- This works out to an annual charge of $1,435.25 x 12 = $17,235 while you are paying a level premium of $3,200 every year!
So, where does the funding for the extra premium come from?
The premium shortfall is met by the insurer selling the underlying unit trusts (automatic) or you can top up the premium which may put a drain on your cash flow as you would be in your retirement years then. Regular selling of the investment will greatly reduce the cash value. The depletion is further accelerated by the volatility of the portfolio.
It is possible to have zero cash value and when that happens, the policy will lapse due to insufficient premium to pay for cost of insurance. And if you have no means to fund the policy, your policy will terminate and this is when you need the protection the most.
Before you take any action on your ILPs, I would be happy to have a chat with you and discuss how you can reduce the negative impact of the charges and maintain the ‘integrity’ of your financial portfolio.