Investment Linked Policies (ILPs)

The New Paper. Sep 09, 2009
By Larry Haverkamp

Most would had bought their ILP from a friend or relative who sold life insurance. Many of which are 'regular premium ILPs'. These require you to use cash instead of CPF money but they offer the convenience of regular monthly payments. The other choice is a single premium ILP. It lets you use CPF money but you must buy with a big lump-sum payment.

ILPs are usually sold through life insurance agents whereas unit trusts are usually bought through a bank or on-line.

The good and the bad of ILPs

There are two types of ILPs: Single premium (good) and regular premium (bad). It is easy to confuse them and agents and financial planners often push the regular premium ILPs because it earns them more commissions.

The commissions will cost you an average of one year's worth of premiums. None of that money goes towards the investments you are trying to buy.

An alternative is a 'single premium ILP'. It does not have the high sales charges but you must come up with a big chunk of money up front. You can also use CPF money to buy it.

A variation is a 'recurring single premium' ILP. You can make regular monthly purchases at no extra charge but each one is considered a new purchase. Many find it cumbersome and inconvenient.

A third choice is a unit trust's regular savings plan. It is like a regular premium ILP except you can buy it with your CPF money and the regular savings feature is FREE.

I think this is the best choice and avoid ILPs altogether. The risk is too high of getting stuck with the expensive type, requiring you to pay a year's premiums for the privilege of having it sold to you.

Test your agent

Give your agent or financial planner a test and ask: 'I want to use cash to buy $100 per month of stocks. How can I do it?'

• IF he tells you that a unit trust with a regular savings plan is your best bet, give the planner an 'A' grade.
• IF he recommends a regular premium ILP but discloses that sales charges are high compared to single premium ILPs and unit trusts, give him a 'C' grade.
• IF he recommends a regular premium ILP and doesn't even mention the unit trust option, give him an 'F' grade and drop him immediately.