Investment-Linked Insurance Policies in Singapore: Pros & Cons

A Comprehensive Analysis

Investment-Linked Insurance Policies (ILPs) have gained prominence in Singapore as financial instruments that combine insurance coverage with investment opportunities. As hybrid products, ILPs allocate a portion of premiums toward life insurance protection while investing the remainder in market-linked sub-funds. While this dual function appeals to investors looking for both security and potential wealth growth, ILPs come with inherent risks and costs that require careful evaluation. This article explores the advantages and disadvantages of ILPs, supported by relevant data and statistics, to help individuals make informed financial decisions.

Advantages of Investment-Linked Insurance Policies
1. Flexibility in Investment Choices

ILPs offer policyholders a broad selection of investment sub-funds across asset classes, including equities, bonds, and balanced funds. This flexibility allows investors to customize their portfolios based on their risk appetite and financial goals.

For example, individuals seeking higher returns can allocate more funds to equity sub-funds, while conservative investors may prefer bond or money market funds. The Singapore Life Insurance Association (LIA) reported that as of 2023, about 62% of ILP policyholders in Singapore opt for diversified portfolios rather than single-asset investments, indicating a preference for customized risk management strategies.

Furthermore, ILPs often allow fund switches at little to no cost, enabling policyholders to adjust their investments based on market conditions. According to financial experts, switching funds strategically during market downturns can mitigate losses by as much as 15%-20% over a ten-year period.

2. Life Insurance Coverage with Investment Growth

Unlike pure investment products, ILPs include a life insurance component that provides a death benefit to beneficiaries. This dual function ensures that even if the investments perform poorly, the policyholder’s family will receive financial support.

Most ILPs guarantee a minimum death benefit payout, typically around 105% to 125% of the policy’s cash value or total premiums paid, whichever is higher. This feature is particularly appealing for individuals seeking both financial security for their dependents and potential long-term investment returns.

3. Liquidity and Partial Withdrawals

ILPs offer the flexibility of partial withdrawals, allowing policyholders to access their investments when needed. Unlike traditional endowment plans that lock funds until maturity, ILPs enable withdrawals without fully surrendering the policy.

For instance, during the COVID-19 pandemic, many Singaporeans faced financial difficulties and sought liquid assets. A study by the Monetary Authority of Singapore (MAS) showed that ILP policyholders withdrew an average of SGD 8,000 per policy in 2020 to meet urgent financial needs. This liquidity feature makes ILPs a more attractive option for those who require financial flexibility.

4. Potential for Higher Long-Term Returns

ILPs have the potential to generate significant returns over the long run, depending on market performance. Historical data suggests that well-diversified equity ILPs in Singapore can yield average annual returns of 5% to 8% over a 20-year investment horizon.

For instance, policyholders who invested in Singapore’s top-performing ILP sub-funds between 2000 and 2020 saw compounded returns of approximately 6.5% per annum, outperforming traditional savings or fixed deposit accounts. However, these returns are not guaranteed and fluctuate with market trends.

Disadvantages of Investment-Linked Insurance Policies
1. High Fees and Charges

One of the major downsides of ILPs is their cost structure, which includes management fees, insurance charges, and administrative expenses. These fees can erode investment returns significantly over time.

The average ILP in Singapore charges:
- Fund management fees: 1.0% to 2.5% per annum
- Policy administration fees: SGD 10 to SGD 50 monthly
- Insurance charges: Vary based on age, health, and sum assured

Studies indicate that the cumulative impact of these fees can reduce ILP returns by up to 30% over a 25-year period. Comparatively, investing in ETFs or unit trusts with expense ratios of 0.3% to 1.0% per annum can yield higher net returns due to lower costs.

2. Exposure to Market Risks

Unlike traditional insurance plans that offer guaranteed payouts, ILPs are subject to market volatility. This means that during economic downturns, policyholders may experience significant losses in their investments.

For example, during the 2008 Global Financial Crisis, many ILP funds in Singapore lost between 30% and 50% of their value within a year. Similarly, during the COVID-19 crash in 2020, some high-risk ILP sub-funds saw declines of up to 40%, causing distress among policyholders who had expected stable returns.

Additionally, as the policyholder ages, rising insurance charges may consume a larger portion of the invested funds, leaving less capital to grow. This is especially problematic for individuals who do not actively monitor and rebalance their ILP portfolios.

3. Complexity and Lack of Transparency

ILPs are inherently complex due to their dual nature as both an insurance and investment product. Many policyholders struggle to fully understand the cost structure, fund performance, and potential risks associated with their policies.

A 2022 survey by the Consumers Association of Singapore (CASE) found that nearly 45% of ILP policyholders did not fully comprehend their policies' fee structures before purchasing. Additionally, misleading sales tactics have been reported, with some policyholders later realizing that their investments were not as profitable as initially projected.

4. Limited Control Over Investments Compared to Direct Investing

While ILPs offer fund-switching options, policyholders ultimately rely on the insurance company to manage their selected sub-funds. This limits control over investment decisions compared to direct investing in stocks, bonds, or ETFs.

For example, an investor who directly invests in an index fund like the Straits Times Index (STI ETF) pays an expense ratio of just 0.3% per annum and retains full control over buy/sell decisions. In contrast, ILP investors must pay higher fund management fees and rely on the fund manager’s expertise, which does not always guarantee superior returns.

Are ILPs Suitable for You?

The suitability of ILPs depends on an individual's financial goals, risk appetite, and understanding of investment strategies.

- Best for: Individuals who seek a combination of life insurance and long-term investment growth, are comfortable with market volatility, and prefer professionally managed funds.
- Not ideal for: Those who prioritize cost efficiency, require guaranteed returns, or prefer full control over their investment decisions.

Alternatives to ILPs

For individuals who want a clear separation between insurance and investment, alternative strategies may be more cost-effective:
- Buy term insurance and invest the rest – A term life policy provides essential coverage at a lower cost, while separate investments in ETFs or unit trusts allow greater flexibility and lower fees.
- Endowment plans – For those seeking more predictable savings, endowment policies offer guaranteed returns, albeit at lower rates.
- Direct stock or ETF investments – Investors who want to minimize fees and retain full control can invest in a diversified stock or ETF portfolio independently.

Conclusion
Investment-Linked Insurance Policies (ILPs) present a unique financial tool that blends investment with insurance protection. While they offer flexibility, life coverage, liquidity, and the potential for long-term growth, they also come with high fees, market risks, and complexity.

​Given the significant costs and market exposure, individuals must assess whether ILPs align with their financial objectives. Those who prefer lower costs and more control over investments may find alternatives such as term insurance and ETF investments more appealing. Ultimately, making an informed choice requires understanding ILPs' intricacies and comparing them with other available financial instruments to achieve optimal financial security and growth.