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Are Investment Linked Products (ILPs) Good?


A lot of people in Singapore are invested into an investment-cum insurance product called ILP which stands for Investment Linked Product. It is actually a hybrid of unit trust and insurance.

At first glance, it looks like an attractive product, as it combines both investment and protection of insurance. But as with most things that are combined together, there are bound to be complications and other associated disadvantages. So what are they?

If you look at the graph above that is taken from the Ministry of Manpower website, you will see that the annual returns of lower risk ILP is just 1.81% and with a high expense ratio of 0.72 eroding the returns of this ILP. This does not compare favourably with just leaving the money in the CPF ordinary account which at 2.5% actually earns more than this miserly returns. And this is actually taking place in a long bull run, so if there is a bear market, this return is likely to be eroded by even more. Some people will say that why there is a low return is because there is the insurance component to it.

However, the counter argument is that investing in ILPs actually means that when say the market is good and you are one of those investors who bought the higher risk ILPs, earning an attractive annual return of 13.24%, and you want to sell it. This would mean the loss of the insurance coverage. This could deter people from taking profit from a bull market that maybe is near the peak, as this would come at the costs of losing the insurance cover. So actually this is the most important reason not to invest in ILPs. Furthermore, the costs of buying an insurance cover when you are older, as everyone knows, is higher so the penalty is high even if you think that you can buy a term insurance or worse another ILPs.

If you buy separately a unit trust that the ILPs invest in and a term insurance (which is one of the cheapest form of insurance that you can buy for the coverage) it will actually be better because when you sell your unit trusts, you do not need to forgo your insurance cover. At the same time, the management fees for unit trusts is hovering around the 1.5% mark annually, which again is lower than that of the ILPs from the medium to high risk category. Thus, I think it is pretty obvious that one should not buy ILPs, but instead will be better off buying the underlying unit trusts that the ILPs invest in anyway and getting the insurance agent to prepare a cheaper term insurance for the same coverage.

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The information contained in this blog is prepared from data believed to be correct and reliable at the time of publication of this report. The authors do not make any guarantee or representation as to the adequacy, accuracy, completeness, reliability of the information contained herein. Neither the authors or any affiliates or related persons shall be liable for any consequences (direct or indirect losses, loss of profits and damages) of any
reliance placed on information provided in the blog.

Shares and financial instruments illustrated in this blog can go down sharply or in certain instruments suffer total loss on the initial investments. Investors are advised to make their own judgment on the information provided and consult their own financial advisors or consultants as to the suitability of the products illustrated to their particular financial needs and objectives before acting on any information contained herein in this blog.