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3 pitfalls to avoid when choosing ILPs



If you are aspiring to start capital appreciation, before you dive head-first into an expensive ILP, we wish to warn you about some of the dangers of ILPs and how not to get yourself into a huge debt.


Potential pifalls:

  • No guaranteed income

  • Increasing cost of insurance coverage

  • Riders


No guaranteed income


While some insurance agents may try and entice you with the high potential earnings that you may reap, you will do well to know that high rewards come with high risks. The potential high interest rates come from mainly investing in equities, which are volatile and this means that your investment returns are not guaranteed. If you invest in a particular stock and it does well and is constantly rising, you can enjoy the full rewards of the capital gain. Conversely, if the stocks fall, you have to bear the full loss.


Of course, you can choose how much of your money you want in equities or bonds to minimize your risks, but ultimately, ILPs are dangerous because there is no safety net and no minimum guarantee value.


Flexibility in fund allocation

Essentially, you are betting your protection money in the stock market. Not to forget, ILP premiums are VERY expensive and only provides you low insurance coverage because part of your premiums are used to purchase the investment sub-funds.

If you are thinking of getting protection and at the same time save some money, Endowment plans may be more suitable. They combine a term protection with a savings element. The interest earned might not be as high as an ILP, but it’s much safer and you will have at least the minimum sum assured.


Increase cost of insurance coverage


Speaking of premiums, your coverage charges are mostly paid by selling units in your sub-fund. However, as you age, the cost of your coverage increases as the risk of death and illness increase, and you will need to sell more units from your sub-funds to fund the same level of coverage. The older you get, there might be a possibility that your units might not be adequate to meet the insurance coverage.



Source: https://www.posb.com.sg/personal/articles/saving-investing/a-beginners-guide-to-investment-linked-policies


From the diagram you can see that as your charges increase, your premiums paid might be used to pay for insurance only, and very little will be used for investing (defeating the purpose of an ILP!). You might just be paying for a very overpriced insurance plan with maybe no monetary growth.


Riders


Lastly, riders. Like with life insurance policies, you can attach riders to your ILPs. Riders are additional benefits that add on to your basic policy.

But be warned, you should do it at your own discretion. Paying for additional riders will reduce the amount of your premium that is actually used for investing. The more riders you add, the less you have for investing. It would depend on your own personal protection and investment objectives. If your primary goal is for investment, attaching multiple riders to your ILP will defeat the purpose. If you want greater protection, then perhaps ILP isn’t the plan for you.


Calculate your risks


Keep in mind these 3 pointers when your agent is explaining to you, especially if you are inclined towards purchasing an ILP. It’s definitely not a plan for everyone. If you are solely bent on investing, you can purchase a cheaper whole life plan, and invest according to your risk appetite in the stock market or in bonds.


But if you are keen on a 2-in-1 policy and do not mind undertaking the risk, our Great Life Advantage provides you with free child cover benefit and up to 300% critical illness coverage. Find out more HERE.

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