Investment-Linked Policies: The Truth

This perception of ILPs as a passive, "set-it-and-forget-it" tool is one of the most pervasive and dangerous misconceptions. While an adviser may help select the initial sub-funds, the fundamental investment risk lies entirely with the policyholder, not the insurer. The value of the policy is directly tied to the performance of these underlying funds, which fluctuate with the market.

There are no guaranteed returns. Many policyholders only discover this harsh truth a decade into their plan, when they find their account value has stagnated or even fallen below the total premiums paid. They realise too late that they weren't buying a sophisticated savings product but were instead bearing the full brunt of market volatility, all while paying a premium for the privilege.

These costs compound relentlessly over time. In the initial years, a large percentage of premiums is directed towards commissions and administrative fees rather than the actual investment units, severely stunting early growth. Even after "welcome bonuses" or initial incentive periods expire, the total annual drag from fees can easily exceed 2% or even 3% of the invested amount. This figure may sound small, but over a 20 or 30-year horizon, it can annihilate a substantial portion of one's potential retirement nest egg.

This stands in stark contrast to the modern investment alternatives now readily available to every Singaporean. A globally diversified Exchange-Traded Fund (ETF) can be purchased through a low-cost online brokerage for an annual expense ratio as low as 0.20%. Digital advisory services, or robo-advisers, offer managed portfolios for all-in fees that typically range from 0.4% to 0.8%. The mathematical conclusion is inescapable: the cost of convenience offered by an ILP is astronomically high, often costing investors more than eight times what they would pay for a more efficient, transparent alternative.

This is where the product's profound inflexibility becomes a painful liability. While some policies offer "premium holidays," these are temporary fixes often subject to strict conditions. If payments stop, the policy may automatically draw down from its existing cash value to pay for insurance charges and administrative fees, cannibalising the very investment it was meant to grow. Should the need arise to exit the plan entirely, policyholders are met with high surrender penalties, especially in the first decade. The "surrender value" returned is frequently a fraction of the total premiums paid, crystallising a significant financial loss and leaving a bitter taste of regret.

This shortfall has dire real-world consequences for retirement adequacy in Singapore. With one of the longest life expectancies in the world and a steadily rising cost of living, every dollar saved for retirement needs to work as hard as possible. Recent financial wellness studies reveal that nearly half of Singaporeans are not on track to meet their retirement goals, facing a median savings shortfall well into six figures. Choosing a high-cost, underperforming product like an ILP during one's crucial accumulation years doesn't just mean a smaller portfolio; it could mean the difference between a secure retirement and a future fraught with financial anxiety.

Ultimately, the challenge for Singapore's new workforce entrants is to look beyond the immediate job search and build a foundation for long-term career resilience. This involves a strategic focus on high-growth sectors, a commitment to acquiring tech-adjacent competencies, and the cultivation of a strong professional network. The first job is a starting point, but in this new economic climate, the journey of building a financially secure career will be a marathon of constant learning, strategic pivoting, and relentless adaptation.

The financial landscape has evolved dramatically since ILPs first gained popularity. The rise of low-cost online brokerages and intuitive robo-advisory platforms has completely democratised investing. An individual can now start building a globally diversified portfolio with as little as SGD 100 a month, with full transparency on fees and the freedom to start, stop, or adjust contributions at any time without penalty. This shift empowers a more effective strategy: keep insurance and investments separate. By purchasing affordable term insurance for pure protection and channeling the rest of the savings into low-cost, direct investments, individuals retain control, maximise flexibility, and ensure that their money is working for them, not for a complex administrative structure.

For those who currently hold an ILP, the first actionable step is to conduct a policy audit. Request the benefit illustration and annual statements to understand the exact fee structure, including all administrative, insurance, and fund-level charges. Compare the policy's actual performance over the last several years against a simple benchmark, like a Singapore or global stock market ETF. This data-driven review will provide the clarity needed to decide whether to continue, restructure, or redirect future funds towards more efficient vehicles.