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“ILPs Can Be a Good Instrument!” Mitch Ong

Insurance, Personal Finance

Written by:

Farhan

ILPs are generally good products

In a two-part series, we explore the world of ILPs, or investment-linked plans. In this second part, we sit down with award-winning financial services consultant Mitch Ong and grill him about ILPs and their supposed effectiveness.

Mention ILPs, or investment-linked plans, to any person with a modicum of financial knowledge and you’re bound to elicit a passionate response for or against this particular product. In the first part of this series, we spoke to asset allocation specialist Brendan Yong, an advocate of the buy-term-and-invest-the-rest strategy, as he explained why you shouldn’t put your money in ILPs.

READ: “You Shouldn’t Buy ILPs!” Brendan Yong

For the second part, we head to the other side and shine the harsh spotlight on award-winning financial services consultant Mitch Ong, who gamely tackles all our questions.

Financial services consultant Mitch Ong believes in ILPs

Why have ILPs been getting the short end of the stick in recent years? Are they as bad as many people make them out to be?

Mitch: Based on my experience, there are three likely reasons why ILPs have a negative perception.

  • Fear of Investments

There are people who are fearful of anything with the investment tag. They would rather keep their money in the commercial banks or place it in a fixed deposit account. Then, there are those who are agreeable to investments but speak negatively of ILPs because they misunderstand the mechanics of the product, favour financial products that they’re more familiar with, or are basing their negative opinions on hearsay.

  • Poor Fund Choices

It’s important to sit down with a certified financial planner who can properly explain the basics of the fund factsheet to you and who is adept at explaining the ins and outs of the product. At the same time, many clients neglect to periodically check in with their financial planners after the purchase. Having said that…

  • The Lack of Follow Ups

There are financial planners are guilty of this and unfortunately, this happens more often than it should. At the same time, there are clients who regularly postpone follow-up meetings with their financial planner. I have clients who have not met me for close to two years even though I keep bugging them! Also, after purchasing an ILP, a lot of clients assume that everything is on auto-pilot and do not keep abreast of market updates.

The beauty of an ILP is that it gives clients the choice of where they want their funds to go to. Other insurance policies such as endowment plans provide no such option. However, because of this, it’s imperative that clients and their respective financial planners regularly update themselves and each other with the latest market news and information.

Are ILPs bad? Well, whether ILPs are good or bad is a matter of suitability. I’m going to be honest. An investment-savvy person might be better off buying term and investing the rest while someone who wishes to invest but is not confident in doing so can enlist the aid of a good financial planner who can help him or her to select the appropriate ILP.

ILPs are good when the consumer wants to have a certain degree of choice and control as to where the money in their policy is going to. ILPs are bad when the consumer is either unsure of or prefer not to make investment decisions and want the money in their insurance policies to be fully managed by insurance companies. In cases like these, these folks should purchase either term or whole life insurance policies – the choice of fund for the latter is fully managed by the insurance company.

READ: 5 Money Moves You Should Make in your 20s

ILPs are not the time bomb that many people make them out to be

Many financially savvy folks have been calling ILPs “time bombs”, claiming that the increased costs of insurance as you age will eventually destroy the investment portion of the policy. That’s really worrying news.

Yes, the costs of insurance does increase with age. However, the claim of ILPs being “time bombs” is based on specific and rather remote possibilities, such as a situation where mortality rates rise way beyond the norm (perhaps due to an incredibly serious epidemic outbreak) or investments performing abysmally lower than projected. In fact, most insurance companies are taking steps to ensure that this doesn’t happen by setting a limit on the coverage per dollar. This prevents the investment from depleting because of occurrences of increased costs of insurance due to mortality. In fact, this isn’t something that’s exclusive to ILPs; even whole life policies can be wiped out if a cataclysmic event occurs that turns the financial world upside down.

Yes, there are insurance companies who allow the client to set an absurdly high amount for the sum assured and this might possibly lead to the cost of insurance depleting the investment. The key is in doing your homework.

However, honestly, generically labelling every ILP as a “time bomb” is a sweeping statement.

Okay, let’s get this out of the way. I’ve always been told that the reason financial planners push ILPs to their clients is because of the insanely high commissions they would be getting. I’ve heard figures ranging from 40 to 50 percent commissions. Doesn’t that influence financial planners to sell ILPs to people who might not necessarily need it?

I can categorically state that this is not true. There are certain whole life policies and even term plans that provide similar levels of commissions with ILPs. At the end of the day, good financial planners provide a comprehensive and well-thought-out solution that addresses the client’s needs.

Those who only push single products don’t last in this industry because the client can sense that the financial planner is putting his or her own needs above the needs of the client. A financial planner who can create a holistic financial plan comprising various financial products that the client requires will always, always, always have an edge over single product pushers.

Additionally, MAS is actually rather strict when it comes to compliance and financial planners. All recommendations for clients have to be well documented and require a solid basis.

Let’s talk about money. Many insurance agencies are focused on production numbers and constantly push their planners to sell as much as possible, which might create a situation where the planner sells plans to people who don’t need them or are unable to pay for them in the future. Do you think this detracts from the supposed goal of a financial planner, which is to properly plan and map out the financial health of a client?

Our job is to lead a client to financial freedom, not financial burden. The financial services industry is heavily regulated by MAS and there are a variety of checks and balances in place to ensure that the financial planner is helping to properly plan, and not hinder, the client’s financial road map. Sure, there are definitely incidents of rogue financial planners who resort to unethical selling. But, every industry has a few bad apples. Selling a product based on commission and ethics is not mutually exclusive.

Let’s take the medical profession for instance. The modern Hippocratic Oath of medicine states that hospitals and doctors should put the well-being of their patients above the bottom-line, and by and large, this is true. Would a hospital lower the charges or help with a patient’s bills if the patient cannot afford the treatment or medication? Do we ever complain that doctors should not bother about the bottom-line?

Everybody works for a living. There is nothing wrong with that. The key is finding a good financial planner who is professional and ethical. Financial planners, being human, are not all made equal.

Like any investment product, you have to purchase ILPs with open eyes

Any last words regarding ILPs?

First of all, you need to remember that investment is for the long run. ILPs are meant for individuals who are willing to commit to the policy for the long term, and not for folks who want to speculate. Policy holders who panic during times of volatile or negative price fluctuations can lose money when they panic sell and prematurely surrender their policies. For example, during the 2008 financial crisis, there were many instances of premature surrender of investment and insurance policies. Some of them blamed the product instead of taking responsibility for their premature surrender.

As I mentioned earlier, if you’re a savvy investor, then by all means, buy term insurance and invest the rest. However, personally, I feel that it’s easier said than done.

Also, ILPs bring something extra to the table – the waiver of the premium rider when the additional critical illness cover is attached to the basic policy. When you’re diagnosed with any of the standard 30 critical illnesses or suffer total permanent disability, your insurance company will maintain the annual investment amount into the fund chosen. If you were to solely invest in a mutual fund, the investment into the fund is likely to cease due to a drop or stop in income. With the advancement in medical technology, it’s highly likely that you will recover from the critical illness after treatment and live for a long time before passing on.

Ultimately, similar to investment products, you should not be buying an insurance policy that you don’t understand.

Read the first part of this ILP debate.

3 thoughts on ““ILPs Can Be a Good Instrument!” Mitch Ong”

  1. Mitch has provided some good points such as lack of follow-ups and customer’s assumption that everything will be auto-pilot.

    But the main reasons provided are just not sound or convincing enough.
    I am an advocate of “buying term, invest the rest” because of its costs-efficiency.
    So allow me to debunk some of Mitch’s points below.

    Disclaimer: Points debated below are only referred to life products that have both investment+insurance features.

    Point 1:
    “An investment-savvy person might be better off buying term and investing the rest while someone who wishes to invest but is not confident in doing so can enlist the aid of a good financial planner who can help him or her to select the appropriate ILP.”

    This statement does not make sense because the funds in an ILP can be bought separately and individually.
    Just because it is attached to an ILP, does not make it any safer or guided.
    Consumers still recieve the same guidance/information/risk-taking as buying the funds individually.

    Moreover, ILPs should not be sold or perceived as an investment alternative.
    If there is a scenerio where a person’s ILP makes more return than his breakeven point, he would be able to profit more if he had bought the funds separately.

    Correction:
    “An investment-savvy person might be better off buying term and investing the rest while someone who wishes to invest but is not confident in doing so can enlist the aid of a good financial planner to advice him on the selection of funds or accordingly to the different risk level of portfolios provided by insurance companies.”

    Point 2:
    “ILPs are good when the consumer wants to have a certain degree of choice and control as to where the money in their policy is going to.”

    It is precisely this flexible feature of the ILP which makes it cost-inefficient.
    To have a (2-in-1 function for 1 standard premium) feature in an insurance product is what makes every dollar less well-spent.

    Of course, this varies accordingly to the age of the life-assured.

    If you compare the long-term(10-20years) distribution charge and costs
    incurred in an ILP to that of a combination of (Term Insurance + Fund/Endownment), there will be a very great difference.
    The monetary benefits received from an ILP such as premium waiver would be insignificant compared to the amount of savings one have would made over the long run.

    Point 3

    “However, the claim of ILPs being “time bombs” is based on specific and rather remote possibilities, such as a situation where mortality rates rise way beyond the norm”

    It is a calculated fact that the assurance charge in an ILP, will jump gradually from 30 to 50 and exponentially from 50 onwards.

    Based on my own calculations(correct me if I am wrong), an ILP account has to make an investment return of approx 4% consistently every year for 11 to 15 years till the account will breakeven (Cash value = Total Premiums Paid).
    Without factoring in inflation, one will know it is still a loss. Moreover, assuming the lifeassured started the policy at 20 yr-old. He would be at the least 30plus once his account breakeven.
    At 30plus, that is when the assurance charges will start to gradually increase yearly and eat up the possible returns over coming years.

    To conclude, how could it be on a specific and rather remote possibility that an ILP is being a time bomb?
    The increasing assurance charge factor alone is enough to consider it as a time bomb.

    Point 4:

    “In fact, this isn’t something that’s exclusive to ILPs; even whole life policies can be wiped out if a cataclysmic event occurs that turns the financial world upside down.”

    Mitch is just using a catastrophic senerio to downplay the “time bomb” feature of the product.
    This is one common technique used in a debate/argument. It avoids tackling the problem head-on.

    Point 5:
    “Yes, there are insurance companies who allow the client to set an absurdly high amount for the sum assured and this might possibly lead to the cost of insurance depleting the investment. The key is in doing your homework.”

    I agee to a certain extent. High sum assured definitely would deplete the investment portion.
    Yet, on the other hand, if the sum assured is too low, then what is the point of getting this ILP?

    The lesser evil in this situation would be to set it to a level which is not too low to to be deemed useless or not to high.

    Alternatively, wont it be more straight forward to just simply get a term insurance and invest in the funds?

    Conclusion:
    The only sensible parts of this article are the portions touching on ethics and the financial planners.

    Mitch is an awarding-planning financial services consultant. He is trained to do objection-handlings when asked on insurance products.

    His reasons may sell to a gullible client.
    But they are not good enough to form a reasonable analysis.

    No offence but he is just a salesperson.
    A financial analyst or an actuary would be a more suitable role.

    Reply
    • Hi Dennishere,

      In response to your comment, allow me to say that every product has its function; Be it H&S, term, whole life, endowment or ILP. I am not an advocate of any individual or specific product As the term for people in my field is that of a ‘financial planner’ and not ‘product pusher’. Hopefully this clarifies that although the topic of my interview is solely based on ILPs, I believe in a holistic approach to finances.

      My response below:

      Point 1: Thanks for your correction on point 1, as that was what I was inferring to anyway if I did not articulate myself well.

      However, I did not state that the safety or that of being guided, is condition precedent, based on the reason that the funds are attached to an ILP. As reflected in the portion which you have quoted, the point I was making here really was that of sound counsel. Having access to a good financial planner is good for aid in monitoring and providing market updates don’t you think?

      You are right in the fact that “Consumers still receive the same guidance/information/risk-taking as buying the funds individually.” I do not dispute that should one buy funds from an online fund trading site, for example, he or she might have access to these positive qualities as well. But because alternatives have similar positive attributes does not nullify that of ILPs? Some of my clients do not have time to digest the sea of financial information available (I mean most of it is on the internet!) and appreciate me sifting through the information, giving them the relevant ones to aid them in making informed decisions. Think of it as picking off the bones and giving them the meat? I hope this clarifies this point I made.

      Point 2:

      I was stunned when you compared the fund in ILP to that of endowment. The 2 are vastly different: Endowment returns come from Par (Participating) Funds.

      “The monetary benefits received from an ILP such as premium waiver would be insignificant compared to the amount of savings one have would made over the long run.” – You might want to rethink this or verify with your own financial planner on these numbers before making this comment, in the light of insurance claim payout between the 2 in the incidence of critical illness of the policy holder.

      Point 3 & Point 4

      I stated in my interview that “In fact, most insurance companies are taking steps to ensure that this doesn’t happen by setting a limit on the coverage per dollar.”

      When you stated that the ‘increasing assurance charge factor alone is enough to consider it as a time bomb’, it is typically already factored into the calculations for the illustration of returns. The comment was not made in the light of increasing assurance charge factor (You really mean cost of insurance charge right?) , it was really made based on increasing MORTALITY RATES.

      Read: http://en.wikipedia.org/wiki/Mortality_rate

      Read: http://www.businessdictionary.com/definition/cost-of-insurance-charge.html

      When you say increasing assurance charge factor, I take it that you mean the ‘cost of insurance charge’ that is already factored into the policies. Mortality rate is an entirely different thing. If the mortality rate of Singaporeans go up, the ‘assurance charge factor’ goes up across the board.

      Which is why I inferred that a catastrophic event (e.g: epidemic) will raise mortality rates and all insurance products will be affected. No downplaying here and there really is no problem to tackle head on? You really do not need someone with an actuarial science degree to tell you that if people are dying left right center, its going to be more expensive to buy insurance, as there will be higher sum at risk?

      I did not recommend to put the Sum Assured too low. It needs to be normal for the premium paid.

      It is not my prerogative to tell you not to ‘buy term and invest the rest’. That is a sound strategy that many are comfortable with. But I am stating that ILPs are not evil and have its functions, as a viable insurance product as well, attested by many who have bought it.

      My personal response:

      This is not a debate and the nature of this interview is a brief one and I had to go into main points. For example, there are countless points I could have made in this article like citing that term insurance typically does not cover til age 99, whereas whole life and ILPs do. So my intention is not to say what is good or bad. I believe this: Every product has its purpose and what is suitable for one might not be suitable for another. And just because it is not suitable for someone in accordance to personal preference, investment behavior, etc does not make it a bad one.

      On a personal basis that while I welcome good commentary, I do not take kindly to your comment that I am ‘just a salesperson’. Please refrain from casting a stereotype of me as a person who is simply ‘trained to do objection handling when asked on insurance products’. You are making a strong statement that my reasons are effective on the ‘gullible’ and I don’t think it is polite conversation. And the purpose of the content in my interview is not to ‘sell’ reasons to buy. Sometimes people fear the unfamiliar but that is the whole purpose of civil discussion isn’t it?

      I joined the life insurance industry upon the devastating financial impact of stroke on my own father, who has since passed on a couple years back. That is what drives me to help people; To help others understand the need to be prepared for the ‘what ifs’ of life and also do the best I can in helping people actually take steps for retirement planning. It is a travesty in society that because of how the industry has been in the past, that good financial planners have to bear with the stigma of being labelled as ‘just a sales person’. I respectfully disagree with your estimation of me. I am not a certified financial analyst or actuary but I am a professional financial planner.

      Reply

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