Investment-linked insurance products: complexity label a long time coming

THE recent news about the rising number of complaints against investment-linked insurance policies (ILPs) isn’t surprising. In 2024, complaints about ILPs filed with the Financial Industry Disputes Resolution Centre (Fidrec) reportedly hit a high of 211, up from 55 in 2023.

This year, 57 complaints were lodged in the first half-year.

ILP sales have surged since around 2022, overtaking traditional participating plans. The sale of ILPs, especially those sold in single-premium mode, tends to rise when markets are strong. But for a product as complex as an ILP, a rising risk appetite driven by fear of missing out and aggressive sales tactics by insurance representatives make a potent brew for mis-selling.

The rub is that those who choose to invest in ILPs for a long-term goal through regular-premium payments may well find that returns over time underperform that of comparable funds without an ILP wrapper.

This is because of ILPs’ high recurring fees, which can exceed 4 or 5 per cent a year. The fees are external to the sub-funds chosen by investors. Nevertheless, they exert a similar downward pull on returns.

I researched ILP structures and fees in March for my Mind the Gap column. I have avoided writing about ILPs for several years because there was little to say – other than “Please avoid ILPs”.

This year, my conclusion was no different from what it was years ago: ILPs are complex and very costly. The complexity arises not from the underlying sub-funds – which may be plain-vanilla equity or balanced funds – but from the structure itself, especially if an investor goes the regular-premium route.

The Monetary Authority of Singapore recently sought views on whether ILPs should be classified as complex products, which would then be red-flagged in their own product highlight sheet (PHS). Under the current framework, complexity is indicated only in the sub-fund’s PHS, which then extends to the ILP wrapper. Recognition of the many caveats inherent in ILP wrappers has been a long time coming.

As MAS said, ILPs are a hybrid of insurance and investment, “with returns subject to the sub-funds’ performance and ongoing insurance premium charges”. “These factors are generally beyond investors’ control and unknown beforehand, making it difficult for retail investors to grasp the ILP’s risk-return characteristics.”

In addition to the proposed PHS for ILPs, insurers should illustrate the long-term performance of an actual sub-fund, which would take into account not only the ILP charges but also the volatility of the sub-fund in order to show the net overall impact more clearly. That performance should be evaluated alongside a comparable fund with no ILP wrapper.

Examples of the mis-selling recently reported in The Straits Times recall 2008, when banks and other intermediaries were censured for overly aggressive sales of the failed Minibond structured note linked to Lehman Brothers which went bankrupt. Vulnerable clients, including the elderly and those less proficient in English, should be given a higher standard of care.

The truth is that ILPs may be a no man’s land where protection is paltry and returns are insufficient for long-term goals. Investors would be better off buying cheap term protection and tapping the many investment options in the market, at far lower costs.