A Complete Guide to Investment-Linked Policies (ILPs)

You can read chapter 4 of our eBook here.

Investment-Linked Policies (ILPs)

The world of ILPs has constantly evolved, and many insurers have launched numerous ILP products in recent years. The Havend team is constantly conducting research to gain a better understanding of these products. In recent years, insurance companies have created different types of ILPs to cater to different market demands.

There are about six different types of ILPs in the current markets.

  • ILP through licensed representative*
    • Protection-based ILP
    • Hybrid ILP
    • 101 ILP
    • Annuity ILP
    • Legacy ILP
  • ILP through robo (without surrender charge)*


In this article, we will focus on protection-based ILPs since it is about risk mitigation (protection).

(*Refer to Annexes in our eBook. Click here to download.)


Protection-Based Investment-Linked Policies (ILPs)

There are many different types of investment-linked policies in the market that cater to different segments. Traditionally, ILPs provide life insurance coverage for a lifetime, and at the same time, you can choose how to invest your policy value from a selected suite of funds. Unlike a whole-life policy, you will be exposed to the risk and return of the investment of your choice, which will result in the policy values being more volatile.

Apart from the risks that you would have to take, the investment-linked policies provide a more transparent fee structure compared to a whole-life policy. ILPs were first introduced to provide you with the flexibility in choosing your own investment fund, which could possibly outperform a whole life policy’s participating fund. Since the risk is borne by you, the policy owner, there is a need to ensure the asset allocation aligns with your risk profile and objective. The cash value accumulated in the policy is very much dependent on the chosen sub-fund or managed fund and it is not guaranteed.

ILPs do not have a guaranteed cash component as it is largely based on the underlying unit trust or managed fund portfolio value. Hence, there is a chance that the policy value may drop to zero after deducting all the applicable fees, which may result in the policy being lapsed or you, the policy owner, being requested to make the additional premium top-up to sustain the coverage of the policy.


Figure 31: An ILP Flow Chart 


When ILPs were first introduced, they were mainly for protection with an investment element, offering the flexibility to apply your own investment strategy rather than relying on insurance companies to invest in their “life fund” or “participating fund.” Unlike the “life fund” or “participating fund,” you will be exposed to the market risk, experiencing the volatility of policy fund value. In the past structure, insurance companies used to manage the underlying investment fund. However, in recent years, we have seen more insurance companies collaborating with external fund houses, such as Schroder, Blackrock, JPMorgan, and even some boutique fund houses to manage the assets for the insurance companies’ ILPs.

The structure of ILPs has since changed over the years, particularly in the underlying investments and ILP charges. Here are some of the past ILP charges:

  • Bid-offer spread (estimated at about 5%)
  • Annual policy fee (annual fixed amount or a percentage of policy value)
  • Annual administrative fee (annual fixed amount or a percentage of policy value)
  • Annual fund management fee (annual percentage of policy value)
  • Cost of insurance (mortality charges – refer to insurance policy)
  • Redemption fee (estimated at about 5%)
  • Switching fee (usually costs about 0.5% to 1%, or insurance companies may waive this)


In the past, unit trusts used to have a bid-offer spread, which means that the unit trust has two prices – the buyer price (offer price) and the seller price (bid price), and typically the spread between the bid and offer prices could be about 5% (also known as a transaction or sales charge). Current unit trusts use single-pricing instead of bid-offer pricing. Using single pricing, or net asset value (NAV) makes it clearer and much easier to understand. For example, here is a situation of buying and selling using bid-offer spread and single pricing methods:


Figure 32: Buying and Selling Using Bid-Offer Spread and Single Pricing Methods


In summary, for a bid-offer spread scenario, when we purchase the unit, we buy it at a more expensive rate than the market rate and when we sell it, we sell it off at a cheaper rate than the market rate.


Overview of Policies

ILPs are structured differently from other insurance policies in the market. The more prominent features are:

  • Choice of investment (to be selected by the client or advised by the adviser)
  • Flexibility of adjusting the sum assured without affecting the cash value and the premium payment
  • Premium holiday (temporarily stop paying the premium for a short period)
  • Flexibility of switching the underlying investment anytime


Let us take a look at the advantages versus the disadvantages of each type of policy: 


Figure 33: The Advantages Versus the Disadvantages of Each Type of Policy 


We have summarised the key points of these three types of policies. From Figure 33, you can clearly see that the term life policy is a simple structure in the insurance product line, but it is fit for purpose, and designed to give you the best protection value at affordable pricing. Whole life and ILP products are more complex and may not be easily understood by consumers, even after explaining the mechanism of operating the policy.


Term Life Policy and Investment-Linked Policies Comparison

Here, we are making a comparison between purchasing ILPs and a buy term invest the rest (BTIR) concept of an annual fee of 1.5% of portfolio value. Using David’s scenario, he has a shortfall of $500,000 in life coverage. We will also use the same profile to generate the differences in premium for comparison.


Figure 34: Investment – Under Advisory Fees Structure 


As shown in Figure 34, even with the advisory charges, the overall portfolio value still performs better as compared to having an ILP. According to the data in Figure 33, an ILP is less attractive compared to BTIR. This is because an ILP has multiple layers of fees including insurance cost, which causes a lower cash value. Analysing the data from the table, you will see that if the investment average annual performs at 8%, the net surrender value at age 60 is $82,284. The total gain in this scenario is only $10,284 over the period of 20 years ($82,284 minus $72,000). Whereas, if the ILP performs at an annual average of 4%, the net surrender value of $51,778 would not even cause a breakeven. Hence, for risk mitigation tools (protection purposes), it is Havend’s preference to keep our clients’ investments and insurance separate.

All in all, ILP is a good concept, but it is a sophisticated product, and you may get the wrong impression while trying to understand some of its features and benefits. If you were to encounter any misconceptions regarding its features and benefits, exiting could prove challenging due to the relatively high surrender charges for ILP in the early years. In most cases, you would be unable to recover the full premium paid to the policy thus far.

In addition, purchasing an ILP does not mean that you are free from managing the policy. In fact, you would have to ensure that your risk profile matches the underlying investment fund. Furthermore, you would need to be constantly updated and actively monitor the underlying investment (sub-fund), making any necessary adjustments to the portfolio where necessary. Therefore, a thorough understanding of the ILP product is necessary and crucial before signing up for it.

Download our eBook at the form below for more details on investment-linked policies.


As a working professional with young children, are investment-linked policies (ILPs) suitable for you? If you are unsure if you should cancel your existing ILPs, reach out to us for a complimentary InsureWell Assessment today.



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