Investing via regular premium insurance plans? Watch the costs

REGULAR premium investment-linked insurance plans (ILP) are a staple among life insurance companies' offerings. The attraction of such plans typically lies in the bundling of insurance and investment, even if the protection value may be modest at best.

ILPs are policies where policyholders decide on their own asset allocation and funds, in contrast to participating policies where the insurer invests premiums collectively.

But if your objective is to commit to a long-term investment, you should scrutinise and compare ILPs' charges, which are substantial and are separate from the underlying investment fund charges. Costs are a significant drag on returns. You may be able to do better by buying term life protection separately, and investing regularly in a portfolio of unit trusts. Some financial advisers are able to build portfolios using wholesale share classes of funds, where you save significantly on annual management fees.

In some cases the insurer's charges could add over 2 per cent to the total cost, which are typically not reflected in the investment fund's total expense ratio. A worst case scenario could see the effective total expense ratio - comprising insurer and fund charges - balloon to over 3 per cent. This is a significant hurdle in an environment where expectations of long-term returns from traditional capital markets are muted at best.

Based on the Life Insurance Association's latest quarterly data, new business inflows into single premium linked policies rose 43 per cent to S$197 million in the six months to end-June, compared to S$137.5 million previously. Non-linked policies which include participating policies are favoured among Singaporeans, generating S$480 million in sales in the first six months.

This piece focuses on ILPs for investment - in regular premium (RP) or recurring single premium (RSP) mode - where the protection value may be as little as 102 per cent of a single premium in a RSP plan or five times the annual premium in a regular premium plan. The sum insured is typically for death and total and permanent disability. Some insurers may throw in a terminal illness benefit. ILP benefit illustrations (BIs) reflect two projected rates of return at 4 and 8 per cent. These are only for illustration and do not reflect any fund's performance.

Here are some of the major cost items you should be aware of. Costs are typically charged via cancellation of fund units at the bid price. Policyholders typically purchase units at offer price, so the insurer earns the bid/offer spread even in RP mode.

There is also a scenario where the value of your units is insufficient to pay for the insurance cover. In this case you may be asked to top up your premium, or the policy may lapse.

Not all insurers disclose the reduction in yield; this disclosure is not required. AIA has the clearest disclosure in this respect, as it states the reduction in yield for both the 4 and 8 per cent scenarios. For its illustration for a 30-year old male (AIA Pro Achiever; annual premium S$2,400), total deductions reduce the yield from 4 to 2.7 per cent for the 4 per cent projected rate of return in the 35th year of the policy, or age 65. For the 8 per cent illustration, the yield is reduced to 6.5 per cent. These numbers suggest a long- term policy expense ratio of 1.3 and 1.5 per cent, respectively. If your BI does not have this, please press your insurer for the calculation.

Income's premium allocation rate and surrender value vary with the plan. For Vivolink, which has generally lower protection value, the premium allocation starts at 55 per cent in the first year, and goes up to 100 per cent from the third year (37th month). The surrender charge starts at 25 per cent for a term of less than 13 months, and dials down to 5 per cent between the 49th and 60th month.