One of our readers asked us about an Investment Linked Policy (ILP) offered by HSBC Insurance. This was in response to our previous article, highlighting the Ugly Truths Behind Investment Linked Policies. Do read the article for a better understanding on why we don’t advocate ILPs.
Unlike products such as health or term insurance that are much simpler in nature, there are many mutations and modifications that an insurance company can introduce to differentiate their ILPs from other products in the market and even other ILPs sold by other companies.
Often, these mutations and modifications are presented as key selling points of the ILP by insurance companies and financial advisors representing them. Let’s take a look at one example presented by HSBC for their GrowthInvest Insurance Plan to better understand how ILPs are sold.
Flexible Product Charge Structure
At this juncture, we need to highlight the fact that ILPs always come with many hidden charges not explicitly made known to policyholders. On this note, HSBC agrees with us.
In their product brochure, they highlighted the fact that many investment-linked policies in the market come with multiple product fee charges such as policy fees, bid-offer spreads and cost of insurance.
HSBC claims it is transparent with the fees it charges for the policy.
1. Product Administrative Fee – 0.1% per month (or 1.2% per annum).
2. Fund Management Charge – Up to 1.55% per annum, depending on fund(s) you choose.
For example, if you invest through the ILP in the HSBC Singapore Equity Fund, the management fee will be 1.125% per annum. When you add that to the 1.2% Product Administrative Fee, you will be paying about 2.3% per annum for the services rendered by the insurance company.
Savvy investors will ponder whether it is worth paying 2.3% per annum in fees to the insurance company and its fund managers. While we understand that insurance companies and the financial advisors that represent them need to earn a living, it comes at the expense of our ability to grow and compound our returns over the long run, and more poignantly, our life goals.
100% Of Premiums Invested
One of the biggest downside to buying an ILP is that part of the premiums paid in the first few years are used to offset the distribution cost of the policy (i.e. the commission for the agents, profits for insurance companies and agencies).
Due to the concept of time value of money, that is a huge disadvantage for policyholders. By contributing to an investment plan, we desire for our premiums to be invested in the market immediately, not to be used to offset peoples’ salaries or profits.
Typically an ILP could have the following allocation rates.
|Year||Premiums Paid Annually ($500 per month)||Amount Payable To Insurance Company||Amount Used To Buy Units In Mutual Fund|
According to HSBC, 100% of your premium will be invested into the funds of your choice from day one. That, to some extent, reduces the disadvantage that is commonly associated with most ILPs.
On the topic of allocation of premiums for ILPs, some insurance companies do what we call back loading. That means instead of taking a fee from the premiums paid in earlier years, they take it from premiums paid in later years instead.
While back loading is technically better than frontloading for the investor, it nevertheless still represents an additional cost that eats into your profits (or increases your losses).
Unlimited Fund Switches
One of the things that an ILP typically offer is the ability to fund switch at little or no cost.
Basically, what “fund switch” refers to is selling units you own in a particular fund and then buying units in another fund of your choice. You can also choose to allocate future premiums paid into this new fund of your choice.
Most financial advisors play this up a lot more than they need to. Since most of these funds are meant for investors to be vested in over the long-term, what you should be doing is to ensure that the investments you made are in alignment with your risk profile.
Consistently fund switching is likely to be a sign that you are simply following market sentiments, which is unlikely to result in an optimal outcome.
Final Question – How Well Are The Funds Performing?
We were curious to find out how well the sub-funds offered in this ILP were performing. In total, there were 8 funds to choose from. Here are a couple of interesting observations we had.
1. Of the 8 funds, 4 have a benchmark index, which they are compared to. Of these 4 funds, 2 of them (Pacific Equity Fund, Singapore Equity Fund) outperformed their index while the other 2 funds (India Equity Fund, Global Emerging Market Bond Fund) underperformed their index.
2. Of the remaining 4 funds that are not compared against an index, 1 is making loss since its inception. The remaining 3 funds have delivered annual returns of 3.5%, 3.82% and 4% respectively. Importantly, these returns exclude any fees and charges payable through deduction of premiums or cancellation of units.
Whether this ILP offered by HSBC, or any other ILPs for that matter, are worth considering is something you have to decide for yourself.
In our opinion however, the returns provided by most of these policies are similar to what people can achieve by themselves sometimes even having to incur much lower risks if they were to make some effort picking up basic knowledge. Hence by doing it yourself, you would be able to save up a significant amount of the fees charged by financial institutions and start growing your money from Day 1.
Do you have a question you need to ask about Investment Linked Policies? You can raise your question on the Insurance Discussion SG Group on Facebook. It is the place for an honest and transparant discussion on insurance related matters in Singapore.
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