“You Shouldn’t Buy ILPs!” Brendan Yong

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Exponential insurance charges are the reason why you shouldn't buy ILPs

In a two-part series, we explore the world of ILPs, or investment-linked plans. In this first part, we talk to asset allocation specialist Brendan Yong and discuss his distaste for ILPs.

Could you give one single compelling argument why ILPs are bad for the average person?

Brendan: It’s just not cost effective. In an ILP, your premium is split between the cost of insurance and the cost of unit trusts. As you age, your insurance cost rises exponentially and the difference becomes quite substantial when you reach the age of 50. Here are a sample of insurance charges from one insurer (click on the image to expand):

An example of ILP charges from one insurer

The numbers circled in red are the ones that you need to take note of.

Important ILP charges you should take note of

For a basic protection plan worth S$100,000 for a male non-smoker, these are the annual costs of insurance with critical illness insurance charges added.

Age Annual Costs
40 S$282
50 S$794
61 S$3,586
70 S$6,604
75 S$9,744
80 S$13,913
85 S$20,023

While you can enjoy lower costs when you’re younger, the insurance costs will exceed your premium in no time and you’ll have to sell your unit trusts to pay for these rising insurance costs.

I’ve compared many different scenarios in my career, and in all instances, the strategy of buying term insurance and investing the difference in similar unit trusts – the same unit trusts that ILPs will go into – always comes up on top.

Are there absolutely no situations when ILPs are somewhat beneficial for the purchaser?

Well, there are two situations when I will recommend ILPs – for a baby or for a young working adult with absolutely no fiscal discipline. ILPs force the person to put in an amount of money every month. The issue with a regular savings plan with a unit trust is that you can stop it at any time. Since it’s more accessible, the person might have the inclination to stop or withdraw the money from the regular savings plan, unlike an investment-linked plan.

However, if you have decent fiscal discipline and possess an interest in investing, then I recommend that you adopt the strategy of buying term insurance and investing the difference in unit trusts instead.

You really don’t like ILPs. When and why did your distaste for ILPs started?

Before I began my career in the financial industry, I already had an interest in numbers and was able to calculate the time value of money. When my insurance advisor at that time recommended an investment-linked plan to me, I took out my financial calculator so that I could compare the charges with term insurance. My advisor’s face turned pale!

Personally, as an asset allocation specialist, I will never implement a plan for my client that I personally wouldn’t buy (Editor’s Note: If you’re considering any insurance plan, always ask your insurance agents whether they possess the plan that they’re selling to you. If it’s as good a plan as they claim it is, then they should have one themselves). I’ve hardly ever recommended ILPs to my clients, unless they are young people with no fiscal discipline or babies!

If ILPs are as bad as you say, then why are insurance agents heavily pushing these plans to the general public?

In my career, when I meet an agent who mis-sells ILPs, he or she is normally either unaware or untrained. Generally, the younger agents are the ones who tend to display a combination of these two factors.

Some insurance agents have no ethics when selling ILPs

 

However, there are also unethical insurance agents who are just out to make money whatever the cost, and ILPs tend to provide the highest commissions. Previously, one of my clients met with an agent who is in the Million Dollar Round Table (MDRT) organisation. The MDRT is an exclusive group reserved for top producing insurance agents. So, I told my client to ask this insurance agent a simple question: “Did you buy into this similar strategy? Show me.”

That was the last time my client heard from the agent.

What are some of the other memorable cases that you’ve come across in your career regarding ILPs being mis-sold?

There are three situations when ILPs are definitely harmful to investors.

  • When ILPs are sold to older people, generally those above 50
  • When the ILP in question has a low protection value and is being sold as an “investment” instead
  • When the ILP comes with a high premium and is sold with the promise that “you can stop paying after an x number of years because it will pay by itself”

With these three situations in mind, I distinctly remember two cases.

  1. A senior member of my church aged 50 asked me to look at his policies – an agent recommended him to purchase an investment-linked plan. To me, it was clear, even from the benefits illustration, that the rising costs of insurance will deplete his cash values. Yet, the agent was still persuading him to buy one. To top it off, the agent selected a China/India fund that was especially risky for someone at his age.
  2. A friend of mine passed me his policies, asking me to help him review them. I highlighted to him that an ILP policy he was holding, one which he was paying S$36,000 a year for, may cause him cash flow problems. He told me that the agent recommended him to split his current fixed deposit in five years and use the money to fund his ILP. Then, he can stop paying for his ILP using money from his own pocket. The insured amount was very nominal.

Do you think giving insurance agents incentives for more production or higher sales results in unethical or ruthless selling? What do you think should be changed?

To be honest, it’s inevitable that there should be some form of incentive for sales. Insurance is not something you go out and buy, like getting groceries or even clothes. It usually involves someone calling you or approaching you during a roadshow. Will people purchase adequate insurance on their own without these indicators? I honestly am not too sure.

With the new balanced scorecard framework from MAS regarding remuneration for financial advisors and insurance agents, there will be more focus on ethics and documentation. The new Financial Advisory Industry Review (FAIR) initiatives will mean that insurance folks will need to meet key performance indicators that are not just related to sales, such as providing suitable product recommendations and properly disclosing relevant material information to customers. Insurers are now obliged to increase transparency such as providing the actual projected rate of return and not the typical Projected Investment Rate of Return i.e. the 5- and 9-percent they always use.

Vulnerable investors will now have more protection. We’re definitely moving in the right direction.

Personally, I feel that there should be no selling of ILPs to anyone above the age of 50 and for agents to be legally obligated to disclose the actual rate of return. I feel that this will definitely cut down on mis-selling.

Any final thoughts?

I feel that it’s important to explain that insurance companies must make a profit, otherwise the concept of risk sharing will fail. Even a cooperative insurer makes profits. In exchange for your premium, your family will be given financial protection and I think that this is a fair exchange.

It’s a matter of getting the right type at the right amount and value. Therefore, getting advice from a well-trained and ethical financial advisor will make all the difference in the world.

Read the second part of this ILP debate.

  • @ Brendan
    I bought ILPs in my 20s, would it be too late to pull out of it now? i.e. it’ll cost me even more to start a whole new insurance plan in my 40s. Thanks.

  • Disclaimer: You should consult a financial advisor before terminating any insurance plans. Comments given here cannot be construed as advice.

    @Deb
    1. What is the purpose of this policy? For protection or for investment/savings?

    2. What is the sum insured and premium you are paying? What are the riders?

    3. Are you a disciplined saver? Savvy investor?

    Diagnosis:
    If you a disciplined saver and savvy investor, you are better off with term invest the rest. (see the article)

    If your reason of implementation was protection, is the sum insured significant? If not, you are better off with Term or increase the sum insured, then terminate before the insurance charges rises exponentially. In which case you might still consider having some lifetime cover via a term till age 99 or a living plan.

    If your reason was investment with a very low protection value, then it's the wrong instrument. Need to calculate the loss vs gain if you were to terminate.

    You may also be giving up riders that have a reason to be there.

    Very general answers because there's not much details.

  • @Brendan Yong: Thank you very much to take time to reply Brendan, very much appreciated it. I will re-look into my options. Have a happy & definitely prosperous Lunar New Year!

  • I'm currently 30, had my ILP for about 5 years. Just signed a term insurance and a multiplier too. I'm not savvy with investment, but do possess fiscal discipline. I'm guessing your advice is to pull out, learn more about investment and just stick to my term insurance? What else would you advice? Thank you @Brendan .

  • I agree with most parts of the conversations, however I believe the room for discussion should be expanded.

    ILP is an investment product that is protection base, not investment base. This means, it is not a platform for wealth accumulation. Neither are whole-life traditional participating plans which provides cash values. Cash values from insurance policies are “bonus” or “opportunity” to recover your premiums, and not cash making machines. Definitely, they are “inferior” to a pure endowment or pure investment platform. These platforms in their pure forms has the least, almost negligible cost of assurance, thus, less costs and charges affecting the returns.

    ILP are not only for babies or the young. It is for people who has a need for it and are aware of how it works for them. In the case of an ILP for the 50s, it is definite that the ILP will approach zero value due to the assurance charges. So it becomes like a term insurance. And therefore, if the intention is to get protection, and not return, the ILP or Term insurance in this case has no difference in the objective, but difference in cost. ILP in this scenario is cheaper than a term insurance.

    ILP has its pros and cons. It is a complex product assumed simple by many as Insurance + Investments. The mechanics and characteristics makes it the most flexible plan. However, really, like term insurance or whole life insurance, they are all insurance plans. Not wealth accumulation plans. And in saying this, I concur with separating Investments from Insurance. ILP is a protection base product.

    Note: With no knowledge of what has been discussed between advisers and clients, assumptions on the discussion only creates groundless debates.

  • i’m in my late 30s and only has a low coverage life plan. Thinking of getting a term plan and do a separate investment. Should I go for ILP and opt for the lowest death coverage? Am I suitable for ILP?

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