ILPs: Invest with eyes wide open
The cost structure is complicated, especially those designed with dual accounts, where the fees for the two accounts may differ
HERE’S the low-down on investment-linked insurance plans (ILPs): They are complicated.
I reached that conclusion after going through the product summaries of at least a dozen ILPs from multiple insurers, taken from the compareFirst site, and some benefit illustrations.
ILPs’ cost structure is complicated, especially those designed with dual accounts, where the fees for the two accounts may differ.
Recurring annual charges are deducted from policyholders through cancellation of units each month. To sweeten this, some insurers pay a generous “welcome” or initial bonus in the form of units, for the first two or three years. There are also loyalty bonus units in later years.
Of course, there is no free lunch. Insurers recover the cost of those bonus units via the recurring charges, separate from the underlying funds’ annual management fees. Fund fees are fully reflected in funds’ unit price.
Personally, I believe simplicity is best. In ILPs, the number of units you have at the start of the year will likely vary from the year-end because of costs and bonus units. Market volatility is another unknown. Policy values illustrated at point of sale at 4 and 8 per cent are unreal.
Because of costs, the effective rate of return may be significantly below the projected returns, especially if one’s investment is conservative.
ILPs take a “carrot and stick” approach. The scheme of bonus units is the carrot to get you to buy and continue with the plan. The stick is the hefty charges you’d incur should you need to pause premium payments before you’re allowed to, or for a partial withdrawal or surrender.
If you are propositioned with the purchase of an ILP, it’s important to ask yourself – what are your objectives? A “101” or “105” ILP – protection value at just 101 or 105 per cent of the premium – provides minimal cover at a lot of cost. The most cost-efficient way to buy protection is a no-frills term protection plan.
And, if the ILP is for investment, why subject yourself to high recurring fees when there are many more cost-efficient options out there?
Most of all, before you commit, you need to evaluate your cash flow needs far into the future. But it’s hard to anticipate when you may have a sudden need for cash. Surrendering or withdrawing from a plan is costly.
