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.
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.
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.
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.
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.