Column on investment-linked insurance’s role in wealth planning ‘misleads and oversimplifies’
To say that ILPs have ‘no place’ in any portfolio ignores their structural nuances, strategic advantages and legitimate role in holistic wealth planning, says reader
I WRITE in response to the Money Wisdom column on Sep 23, titled “Investment-linked insurance plans: That welcome bonus could cost more than you expect” by Christopher Tan of Providend. He stated in the column that “there is no reason to have ILPs in one’s portfolio”.
While I appreciate the intent to educate readers, the piece presents a deeply misleading and oversimplified view of investment-linked insurance plans (ILPs). This risks misinforming the public and undermining informed financial decision-making.
To claim that ILPs have “no place” in any portfolio ignores their structural nuances, strategic advantages and legitimate role in holistic wealth planning.
Below are critical omissions and inaccuracies that warrant correction:
- Cost structure misrepresented: The article applies a generic 2.5 per cent expense ratio across all ILPs, disregarding how modern ILPs are designed. Some policies charge less than 2 per cent and cap charges on cumulative premiums rather than account value, effectively locking in costs even as portfolios grow. This structure benefits long-term investors in growth and aggressive funds, in which compounding amplifies returns far beyond administrative expenses. Not all ILPs are alike, and generalisations harm understanding.
- Time value of money and compounding ignored: The analysis fails to account for the power of long-term compounding. Many ILPs credit bonuses upfront, allowing the full value to grow over time. The ongoing fees, while visible, are dwarfed by the cumulative gains realised through decades of growth resulting from compounding the upfront bonus, something passive fee-based platforms rarely replicate.
- Flexibility: The claim of “limited fund options” is factually incorrect. Some ILPs offer unrestricted switching among a wide range of underlying funds – more than 150 globally diversified unit trusts. This level of dynamic asset allocation is rarely available to retail investors without high sales charges and platform fees.
- Currency hedging is a sophisticated advantage: ILPs provide access to currency-hedged and currency-denominated funds (in US dollars, euros or Singapore dollars) that are difficult for individual investors to access directly. These tools are vital for cross-border families and expatriates. These products come with professional advice, adding tangible value beyond fund selection.
- Part of holistic planning: To dismiss ILPs as “unsuitable for anyone” is irresponsible. Clients relocating overseas will find that ILPs can mitigate capital-gains tax and estate duty exposure. As Vanguard’s Advisor’s Alpha study shows, professional guidance can add 3 per cent-plus in net returns through behavioural coaching, tax-efficient asset location, rebalancing and cost-conscious fund selection. These services are embedded in properly structured ILP advice.
- Conflict of interest not disclosed: The article promotes a fee-based advisory model without disclosing its own costs, often 1 to 2 per cent annually on assets under management, plus fund-level fees. Yet ILP clients pay only transparent, upfront administrative charges with no hidden ongoing advisory fees. Transparency must apply equally to all models, not just those under scrutiny.
- Complaints taken out of context: While the article cites rising complaint numbers, it omits context. Complaints relative to total ILP sales remain under 1 per cent, comparable to or lower than for other investment products. Raw figures without benchmarks are misleading.
- Regulatory oversight validates ILPs: If ILPs were inherently flawed, why does MAS permit them? The issue is not the product, but mis-selling. Regulatory frameworks exist precisely to ensure proper disclosure, training and suitability; and these are enforced. The solution is better education, not elimination.
ILPs are not for everyone, but to say they are for no one is not only inaccurate; it is dangerous advice. When properly structured, transparently explained, and aligned with individual goals, ILPs remain a powerful, flexible and tax-efficient tool in comprehensive wealth planning.
Trishita De Mello, CFA
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Christopher Tan (Providend) replies:
The first objective of my article was to show why ILPs can be complex due to their cost structure. The letter above correctly points out that different policies have different pricing structures, which further reinforces this point.
The accompanying graphic in my column showed the total annualised fees (including total expense ratios of underlying funds) after taking into consideration the policy fees of five insurers, as well as the time value of money.
The 2.5 per cent is the policy fee of a sixth insurer, and not the underlying fund expense ratio. I did not account for possible growth or losses of the ILPs, because it was just an illustration of how the policy fee works.
In November 2023, I wrote about wrap fees charged by financial advisers, but did not revisit those in the September column, which was for a different purpose.
The second objective of the column was to share why Providend does not find ILPs suitable for investment portfolio management. Most advisers refer to ILPs as suitable products for clients’ wealth-management portfolios. They mean different things.
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