If you have ever spoken to an insurance agent on the street, or went for a meet up over coffee with an insurance agent friend, chances are you would have heard about what an Investment-Linked Policy (ILP) is.
ILPs are policies that provide both insurance coverage and investment options. They are expensive products, given the value that they provide. We dislike it and you can read more about the reasons why in this article – Why are saying no to ILPs in Singapore.
So why are Singaporeans still buying ILPs today? Here are 5 reasons we can think of.
1. We Got No Idea What The Heck We Are Buying
How many of us can claim that we understood what an ILP was when we first bought the policy? We reckon if you truly understood what you were getting, and the alternatives available out there, there is a great chance you wouldn’t have bought it in the first place.
Some of us may have bought the policy from a friend who we wanted to show support for, a friend who is no longer working in the industry once he or she ran out of friends to sell insurance policies to (true story, happened to us).
Others may have been convinced by an agent that letting our money rot in the bank is a bad idea, and that we should do something about it, even if that something was to park the money into an ILP that we didn’t know much about.
2. We Know Investing Is Important, But We Don’t Know What To Do
Being financial writers, we get to engage in regular conversations with people about financial matters.
One of the things that strike us is just how common it is for people to agree that investing is important, but not have any idea how they should invest.
ILPs offer a great solution for such uninformed investors. Your agent promises you that the product they are selling is the “perfect product” for you, and that do not need to spend time learning how to invest.
Basically, they are telling you to just “pass them your money each month and let them do the rest”.
Learn And Do It On Your Own
A responsible financial educator would encourage individuals to learn to invest for themselves. You can get a book, attend a talk or read articles on the internet. The time spent picking up this knowledge will become an important life skill, unlike spending time playing Pokémon Go.
Today, we live in a world where retail investors have access to investment products that weren’t available in the past.
For example, we can now invest in overseas markets through online brokerages. We can invest in a diversified portfolio of stocks via exchange-traded funds (ETFs).
You can learn the basics which in turn, would help you become a better investor in the long run.
Read Also: Why It Makes Sense For You To Invest In ETFs
3. We Are Confused Over Insurance And Investment
Protecting the needs of our families through life insurance while generating returns via investments are two of the main elements of personal finance.
ILPs are designed to provide both of these needs while giving policyholders the flexibility to adjust between investments and insurance. Typically, ILPs will obtain a premium from policyholders. Part of the premiums will be used to pay for insurance coverage while the remaining amount would be used for investments.
One thing we realised is that young working adults are particularly susceptible to the idea of combining insurance with investment. That is because the insurance needs for younger people who do not (yet) have dependents are lower. Hence, agents would promote ILPs, suggesting that they are ideal products since policyholders can adjust their insurance need upwards in the future.
Instead of buying an ILP, what you should do is to keep your insurance and investment needs separate. If you need life insurance, you can consider a term life policy. For your investment needs, you can consider investing in stocks, bonds, REITs, ETFs or unit trusts.
Get the “best of both worlds” by keeping your investments separated from your insurance, not by combining them together.
4. It Is Being Sold To Us Actively
Insurance companies love sending salespeople to loiter outside of MRT stations to generate leads. Or to go door-to-door to get unsuspecting individuals to fill in surveys, hoping to find an opportunity to further the conversation about the products that they are selling.
Don’t get us wrong, we are not faulting their efforts. Standing for hours in the streets while constantly getting rejections isn’t a pleasant experience. What we don’t understand is why anyone would consider buying insurance policies on the street after completing a survey. We are talking about an important product that may require payments over the next 20 years and you want to buy it on the street? It doesn’t make any sense.
Insurance agencies and their salespeople are generally a bunch of pretty aggressive people. Their job is primarily to sell you the products their company is offering. Most of them are only paid when they close a sale. It’s simply business.
Other financial products such as investing via ETFs, CPF and the Singapore Savings Bonds do not have that many sales advocate, if any at all. That’s one of the reasons why you are more likely to find an insurance agent who wants to tell you more about that ILPs, rather than to advocate you to learn to invest on your own.
5. High-Profit Margins
ILPs are created to provide incentives for anyone involved in the sales process.
At the top level, management fee for funds could be about 1.5% per annum. Insurance companies also charge an administrative fee, which could amount to about 1% per annum. This adds up to a total of 2.5%.
In earlier years, part of the premiums paid by us, the policyholders, are also used to offset distribution costs, which is basically a nicer way to term the commissions paid to insurance agencies and agents.
How much could this add to? Let’s work out some maths based on the ILP illustration shown by a well-established insurance company.
|Age Policy Begins||35 years|
|Duration For Premiums||20 years (until age 55)|
|Assumed Returns||8% p.a|
|Total Returns At Age 70||$448,916|
$448,916 seems okay until you realised that total returns should have been $870,988 to you given the 8% per annum return. That’s a difference of $422,072. Pretty shocking isn’t it?
Actual returns to policyholders are about 5.5% per annum (assuming the funds are able to generate 8% per annum). That means insurance companies are taking a fee of about 2.5% for their work in getting you to invest via the ILPs they have created.
This is a great deal…for them, and at best, only an average deal for the consumers. Now you know why we dislike ILPs. And why insurance companies love selling them.
Insurance Is Important – But So Is Investing
This article is not meant to be an excuse for you to stop talking to insurance agents. Insurance is important, and all of us should aim to find a trusted agent (if we don’t already have one) to guide us with proper insurance advice. At the same time, we don’t just blindly buy whatever that is sold to us by agents, especially if it’s an ILP. Ignorance when it comes to finance related matters can be costly, literally.
In fact, in countries such as Hong Kong, campaigns led by consumers have already led to regulatory changes over the past couple of years.
You don’t have to wait for changes in the industry. Learn the basics of investing and do it for yourself. The savings you enjoy can be significant over the long-term.
Read Also: The Ugly Truths Behind ILPs
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