FAQ: Charges of an Investment Linked Policy

1. What is an Investment Linked Policy?

An Investment Linked Policy (or ILP as it is commonly known) is an insurance policy where you pay a single premium or regular premium, which is invested in an investment fund. The premium is used as follows:

a) A portion is used to pay for the "mortality charges" to provide the life insurance cover.
b) A portion is used to pay the expenses.
c) The remainder of the premium is invested in the fund.

2. How is the mortality charge calculated?

a) The mortality charge may be calculated as a one time cost that is deducted from the single premium

b) It can be calculated as an annual cost that is deducted from your premium each year. It can also be deducted monthly. The annual cost may be fixed for the term of the policy, or can be computed each year based on your sum assured and your age. As the premium rate increases with age, you will have to pay a higher mortality charge as you grow older. Some people describe it as a "a time bomb"

c) In some cases, the mortality charge may be waived.

3. What are the expense charges?

a) Policy administration fee

This can take the form of an initial fee (say $50 to $200) plus an annual fee (say $20 to $60 a year). It is deducted to pay for the expenses of the insurance company. In some cases, the intial or annual fee may be waived.

b) Distribution cost

This is deducted to pay the commission to the agent and other marketing expenses. It is described indirectly as "percentage that is allocation for investments".

For example, an ILP policy will state that 20% of the premium is allocated for investment during the first year, and 50% is allocated during the second and third year. 100% is allocated from the fourth year onwards. This means that 80% is taken away during the first year, 50% during the second year and 50% during the third year. The total is 180% or 21 months.

This cost applies only to a regular premium ILP policy.

c) Spread

You pay the Spread, which is the difference between the Offer Price and the Bid Price of the fund. This difference is usually between 3% to 5%. The spread can be reduced during promotions. You buy the units at the Offer Price and sell at the Bid Price. You incur a cost of investing in the fund through the Spread.

d) Expenses of the Fund

There is an annual management fee and other cahrges that are deducted from the fund. This is described as the Expense Ratio of the fund and be 1% to 2% of the fund yearly. The expenses are deducted directly from the fund and can reduce your yield by the same percentage point.

4. How much of my premium is invested?

If you invest a single premium, between 95% to 97% of your premium is invested,

If you invest a regular premium, between 20% to 85% of the premium is invested during the intial three years. The precentage that is invested is close to 100% in the later years.

The above figures are before deducting the mortality charge. If the mortality charge is deducted, the amount that is invested will be lower.

5. Can I avoid these charges by investing in a unit trust?

If you invest in a unit trust, you have to incur the following charges:

a) Spread
b) Expenses of the Fund

You save on the following:

a) Policy administration fee
b) Distribution cost

The saving in expenses can be substantial.

The unit trust does not provide any life insurance cover. This is not a problem, as you can buy Term insurance and pay for the cost separately. You may find the cost of the separate Term insurance to be lower than the mortality charges in the ILP plan.

6. Is there an ILP plan that offer low charges?

You can buy a single premium ILP plan and make adhoc top-ups. This will avoid the high Distribution Cost and have a higher proportion of your premium to be invested.

Your initial single premium has to meet a certain minimum, say $5,000. The top-ups have to be at least, say $500.

Some single premium ILP plans waive the policy adminstration fee, if you have total investments above a threshold, say $15,000.

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