Investment-Linked Insurance Plan: A Ticking Time Bomb!

The Straits Times article “Insurance ‘Time-bomb’ Set To Explode, Investment-linked Policies Incur Rising Costs Which Buyers May Not Be Aware Of” published on February 12, 2005 never quite left my mind. The headlines immediately caught my eyes back then, before I entered the Independent Financial Advisory (IFA) industry.

A regular premium Investment-Linked Insurance Plan (ILP) combines insurance with investment (unit trusts). The underlying investment risk is born entirely by the insured. This means that returns are subject to market volatility and hence, not guaranteed.

Why then should an individual buy an insurance product when an insurance policy is meant to transfer risk and not to take on risk? It will be more appropriate to separate one’s protection needs and investments.

In 2004, I had my insurance portfolio examined by a friend who was a comprehensive financial planner. Then, I owned 4 ILPs – 2 from Prudential and 2 from AIA. I was paying close to $19,000 for these 4 policies. I had a rude shock when I was told about the escalating mortality (insurance) charges as I age and how they will impact the investment returns.

I do not remember much about the details of the ILPs when my agents sold them to me except that emphasis was on the returns. What seemed to be ‘benefits’ turned out to be something I did not expect at all. ILPs are often sold based on these ‘pros’:

• “It is suitable for young people as the cost of insurance is very low.”
  My reply: “A term insurance policy also offers cost effective protection.”
  
  
• “It can provide you with good long term gains.”
  My reply: “Investment returns are not guaranteed and potential long term gains can also be achieved through pure unit trusts.”
  
  
• “It gives you the flexibility to go on premium holiday.”
  My reply: “If you buy term insurance and invest separately, you can also activate the so called ‘premium holiday’ (i.e. taking a break in paying premiums) by pausing the investment and partially selling the units.”
  
  
• “A regular premium ILP allows a person to increase his coverage.”
  My reply: “One can get additional coverage by buying another term or whole life insurance policy.”

So, why buy an ILP when you can achieve the same objective through a pure protection plan and unit trusts? If your current insurance portfolio is made up of multiple Investment-Linked Insurance policies, it is time you review it and get fresh perspective on how they fit into and support your overall financial planning goals.