Tons of people fall victim to Investment Linked Policies (ILPs) all the time. There are a few reasons for that.
Firstly, many of us are unaware of how ILPs really work, and what are the other, better, investment opportunities available. Secondly, we are often pitched ILPs by agents, most of whom are determined to sell them because of the high commission they earn for such deals.
We are told what we want to hear, and many times, in our ignorance, we simply accept what is shared with us as the truths.
Half-truths are always difficult to pinpoint. An insurance agent can tell you many important truths about investing such as why you should start young and why compound interest is important. They may even teach you concepts such as diversification and inflation. When they finally talk about the ILP as the solution to these problems, it sounds believable.
You raise some legitimate concerns, yet in their eagerness to close the sale, agents sometimes avoid telling you the full story. Here are 4 examples of some half-truths that agents say about ILP.
# 1 “You Can Stop Paying Anytime You Want”
Question You Asked – “What if I want to stop paying the premiums in the future before the policy matures?”
People generally hate commitments.
Telling a person he is signing up for an investment plan that would require him to pay $500 a month, for the next 40 years, is a sure way of getting him to think thrice about signing on the dotted line.
To overcome that concern, unethical agents may sometimes tell prospective client that premiums for ILPs can be stopped anytime; with the client being able to cash out whatever investment the ILPs have accumulated.
While that is technically true, what the insurance agent does not say is how such an action would be, literally, a costly one for the policyholder.
That is because many ILPs are front-loaded, which means a significant portion of premiums paid in earlier years are used to pay for distribution expenses (i.e. commission, agency fee) incurred by the ILP instead of purely being used for investing. For most ILPs to have a chance of making sense, policyholders should commit to holding it for at least 20 or more years.
If you were concern about commitment, or are not sure if you can really afford the plan for such a long time, say no to it. Don’t simply let your insurance agent explain away the concerns you have.
# 2 “All Investments Have Risk, Even The Money In Your Bank Is Not Risk-Free”
Question You Asked: “Are The Investment In The ILPs Risky? Will I Lose Money?”
Most people are risk adverse. That’s why we like to ask how risky an investment is.
Unlike unregulated scam artistes whose main job is to con you of your money, insurance agents are regulated by MAS, and are required to provide prim and proper advice to their clients based on their needs.
However this doesn’t mean they do so all the time. In fact, a mystery survey done by MAS in 2011 found that only 28% of products recommended by agents were found to be suitable. That means you are more likely to be recommended a product that is unsuitable for you.
Most insurance agents are aware that ILPs are not risk-free, and hence, would not try to convince you that it’s safe to invest in ILPs. Rather, what they would do is to tell you that no other investments you make are risk-free either, which is true. We have even seen agents saying that bank deposits are not safe either, beyond the $50,000 guaranteed by SDIC, in an attempt to justify risk-taking by saying that everything else in the world is “risky” as well.
Comparing the “risk” you take by putting your money in a bank account vs. an ILP is totally different. Your agent should be taking the time to properly explain to you the various risks that an ILP faced, rather than to push the question away by associating risk to all other non-ILP instruments.
If he or she cannot explain to you the risk, or can’t be bothered to do so, then you should walk away.
Remember the concept of risk optimisation. Given an expected return you hope to achieve, people should aim to take as little risk as possible. For ILPs, you may see a projection assuming an 8% return (and hence, the risk associated with obtaining that return) only delivering 5.5% to an investor. The question policyholders should ask before committing to a purchase is whether or not an ILP is giving them the best returns for the risk they are taking on.
Read Also: Should I Cancel My ILPs Plan
# 3 “You Are Not A Trained Professional, Hence, It’s Better To Let Experts Manage Your Investments For You”
Question You Asked: “Why Don’t I Invest On My Own To Get Higher Returns?”
After knowing how much transection costs you are paying for an ILP, you might be tempted to start learning how to invest for yourself, and to do it on your own. We think that is a great idea. People should be encouraged to take charge of their own finance.
However, self-serving agents may choose tell you that your money is better off being left in the hands of professionals fund managers, and that you should invest through them, rather than to learn how to do it for yourself.
What they don’t tell you is that it’s not difficult for retail investors to get started on investing on their own. For example, they can do so by buying ETFs that track the market.
And even while it is possible for fund managers to do a better job in generating higher returns compared to passively managed ETFs, what we need to take into consideration is how they fare after management and administrative fees.
# 4 “Our Funds Perform Better Than The Indexes They Benchmark Against”
Question You Asked: “How Well Are Your Funds Performing?”
Most ILPs allow you access to many different funds. All of these funds are invested into different products across multiple countries.
Some of these funds are benchmarked against an index. In simple terms, what it means is that the fund is comparing its performance against a market index out there.
Some agents would show you how the top-performing funds in the ILPs have been faring. You are impressed by the returns they deliver.
A simple mistake at this point would be to assume historical returns from these funds equate into future returns. That is not true.
Just because a fund delivers an outstanding performance over the past 3 years doesn’t means it’s going to do well in the next 5 years to come. Only on hindsight is your insurance agent able to choose the best funds.
What you can do instead is to take a quick look at the list of funds that the ILP offers you.
Chances are, you would find a good mix between funds that beat the market and funds that have underperform This gives you a better overall picture of how the funds in the ILPs have performed, rather than to only rely on the funds that your agent wants to show you.
Read Also: How Do ILPs Sell Themselves?
Should You Trust Your Agent?
The role of an insurance agent is paramount for anyone who is looking to invest in an ILP. An agent who is simply trying to generate sales without being knowledgeable is unlikely to provide any value-add to his clients. So make sure you question your agent thoroughly on the products he or she is selling you before buying it.
And as always, walk away quickly if you ever sense the agent isn’t being honest with you.
Have a question about an ILP that you bought? You can have a discussion with other like-minded individuals on this open Insurance Discussion SG Facebook group.
Read Also: Why Singaporeans Are Still Buying ILPs
How can you choose winning stocks in Singapore? Join us on 16 November in our next 90-minute series: Guide To Choosing Winning Stocks, as we discuss some of the key elements to look at when choosing stocks to invest in.
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