5 things you must understand before buying any ILP

Why do some Singaporeans find value in Investment-Linked Policies (ILPs) as part of long-term financial planning, while others have negative impressions of them?

The difference in opinions usually lie in understanding and suitability.

The truth is: ILPs are not meant for everyone. They are also not designed to be short-term or low-effort investment products. This article explains five important areas that are commonly misunderstood, so that you can better assess whether an ILP is suitable for your situation.

1. An ILP is a combination of insurance and investment

An ILP is not a pure investment product.

When you pay premiums into an ILP, the money is used for several purposes:

• Paying for life insurance coverage
• Covering policy and administrative charges
• Investing the remaining amount into selected funds

This means that not all premiums go directly into investments.

For example, someone who buys an ILP is paying not only to grow money through market-linked funds, but also for insurance protection within the same policy. This is different from someone who buys term insurance separately and invests entirely through a low-cost platform.

An ILP may suit individuals who:

• Prefer a single, structured solution
• Want insurance and investing combined
• Value discipline and regular contributions

It may be less suitable for individuals who are comfortable managing investments on their own and want to minimise costs as much as possible.

2. ILPs have higher costs, especially in the early years

Cost is one of the main concerns people have about ILPs, and it is important to be clear about this.

ILPs generally have higher overall costs compared to direct investing. These costs may include:

• Insurance charges, which typically increase with age
• Policy fees and administration costs
• Fund management fees

Many ILPs are structured with higher charges in the earlier policy years. If a policy is surrendered early, the policy value may be lower than the total premiums paid.

This is why someone who commits to an ILP for twenty years but exits after three or five years may feel disappointed, even if the underlying investments did not perform poorly. The policy was not held long enough for the structure to work as intended.

ILPs are designed for long-term planning. They are generally unsuitable for individuals who may need to stop premiums or exit the policy early.

3. Risk comes from the investment funds chosen

ILPs are sometimes described as risky products. In reality, the level of risk depends mainly on the funds selected within the policy.

Most ILPs offer a range of investment options, such as:

• Equity funds, which can provide higher long-term growth but fluctuate more
• Balanced funds, which aim to balance growth and stability
• Bond or income funds, which tend to be more stable but offer lower growth potential

Two people with the same ILP can have very different experiences depending on how their premiums are invested. Someone who allocates mainly to equity funds should expect periods of volatility, including market downturns. Someone who allocates to more conservative funds may see steadier values, but lower long-term returns.

ILPs do not remove market risk. Policy values can rise and fall, especially in the short term.

4. Flexibility features are useful but come with trade-offs

Many ILPs offer flexibility features, such as:

• Premium holidays
• Fund switching options
• Adjustments to premium amounts

These features can help during temporary financial difficulties, such as job changes or unexpected expenses. However, they do not come without some trade-offs.

When premiums are paused, insurance charges and policy fees continue to be deducted from the policy value. If this happens during a market downturn, units may be sold at lower prices, which can reduce the long-term value of the policy.

Flexibility should therefore be viewed as a safety measure, not a regular strategy. You should understand how using these features affects policy sustainability and future outcomes.

5. Policy values and returns are not guaranteed

ILPs are market-linked products. This means:

• Returns are not guaranteed
• Capital is not protected
• Policy values depend on market performance

Policy illustrations are provided to help explain how a policy might perform under certain assumptions. They are not predictions of actual returns. Actual outcomes may differ due to market conditions, fund performance, and charges.

Short-term losses are possible. ILPs are more suitable for individuals who are prepared to stay invested through market cycles and focus on long-term objectives.

Who should consider an ILP

An ILP may be suitable for individuals who:

• Have a long-term financial horizon
• Prefer structured and disciplined saving
• Want insurance and investment combined in one plan
• Understand that costs and market risks exist
• Are unlikely to surrender the policy early

Who may wish to consider other options

An ILP may not be suitable for individuals who:

• Need short-term access to funds
• Are very cost-sensitive and confident in managing investments independently
• Prefer guaranteed or capital-protected products
• Are uncertain about long-term premium affordability

Mismatch of expectation and reality

Some of the most common issues that customers experience with ILPs are usually born from a mismatch of expectations and reality. These include:

• Treating ILPs as short-term investments
• Not understanding early-year costs
• Expecting stable or guaranteed returns
• Exiting the policy too early

When ILPs are understood as long-term planning tools rather than quick-return investments, outcomes tend to be more aligned with expectations.

Your decision point

ILPs are not designed to be suitable for everyone. They are one of many tools available for financial planning. For individuals who value structure, discipline, and integrated protection, and who are prepared for a long-term commitment, an ILP can play a role in a broader financial plan.

The most important decision is not whether ILPs are good or bad, but whether a particular ILP is appropriate for a particular individual, based on their goals, time horizon, and ability to stay invested.