How should I read the numbers on my Investment-Linked Policy (ILP)?
I lost more than 2 months worth of salary to learn this important lesson: when insurance and investments are bundled together into a single product, the consumer is often left worse off.
A few years ago, when I was a naive fresh graduate in my first job, I met a friend of mine to understand more about financial planning and insurance. My knowledge then was limited – I knew I needed to invest and buy insurance, but I didn’t know what was essential to get. Furthermore, at that time all I wanted to focus on was to put in my best effort at work so that I could get promoted and climb the corporate ladder.
Insurance was the last thing on my mind. So I went with my friend’s advice, thinking that as a financial advisor, they’ll probably know better than I. He recommended me an ILP, I briefly read through the policy and asked some questions, and then I
stupidly thought I knew everything. I didn’t quite know how to read the benefits and premiums table, so I simply took him at his word.
A few years passed and my career reached a more stable stage. I then decided to take a second look at my policy, and was shocked when I learnt how to read the numbers and realized the hard truth of what I had signed up for.
I signed on the above, but did not truly understand what I was committing myself to. The terms and conditions were NOT clearly explained to me in the way I’ve dissected it below, and if I had known these earlier, there was no way I would have signed up for such a plan.
Regular readers will know that I announced on my blog sometime back that I had cancelled my ILP policy, but I’ve never gone into details to explain why I did so. Part of the reason was also fear – I was worried that if I reveal this, I’ll get screwed over by insurance agents on my blog or even sued by insurance companies for ruining their rice-bowls. Back then, there weren’t as much people writing about ILPs as there are today. But despite more information, there still isn’t a resource from a consumer point of view on what these ILPs really mean to an individual, so I’ve decided to finally share my story about why I cancelled an ILP plan that didn’t work for me.
For confidentiality, I will not be sharing the name of the plan I bought.
This table above is the benefits illustration table. If you compare columns 2 and 6 (where my agent pointed me to), the policy looks good, doesn’t it?
Put in $72,000 over 40 years and get $176,561 back! That’s $100,000 FREE!
What I didn’t know then was that if I put my money elsewhere, at 8% I’ll be getting $500,000 instead – FIVE TIMES MORE! (Remember this figure, I’ll come back to this later.) But of course, my agent didn’t tell me this. To give him the benefit of doubt, I’m not sure if he even knows such an alternative (easily) exists?
Why such a jarring discrepancy?
The answer lies in the high costs charged to the consumer for the ILP. Aside from paying your agent their commissions, you also pay a lot of money just for them to manage the funds for you. Over 40 years, this works out to be $327,045 on my plan, leaving me with only $176k for myself.
Add up both figures and you’ll get $500k. Now do you know why I said earlier that I should be getting $500k back instead for the same amount of money invested?
I then decided to calculate how much I’m paying for these distribution costs. Divide $24,534 by $75,600 and that works out to be 32.4%. These are fixed expenses – no matter whether my policy makes money or not, the insurance company still gets paid.
32% is a LOT of money. That’s like me telling someone, “hey give me your money to invest for you. Whether or not you make or lose money, you still have to pay me 1/3 of the total capital though!”
Would you take up this business proposal? Probably not. I don’t know why I was stupid enough to say yes to this back then, and paid a price for this naivety.
My agent pointed this clause in the T&Cs for me. When explained this way, it does seem like a good proposition – “it is not an additional cost to you!“
But even if they earn 8%, you will NOT be getting that much, so don’t be fooled by your agent into thinking that you will. Take a look at the clause below to understand why.
Both 4% and 8% are used, and the inclusion of the 8% column does make the benefit illustration table so much more appealing (and an easier sell). My agent focused more on this, saying that leaving my money in the hands of experts who know how to invest will probably be better than if I invested myself.
Now let’s examine what happens if my policy makes a more plausible 4% p.a. instead. Since my money is growing, I should be benefiting, right?
WRONG. This gets even more shocking: I get back LESS of my total capital even if my money grows at 4% p.a. To be exact, I’ll stand to lose $10,447.
Back then, I had asked my agent about this $10k loss. He explained that it was because some portion of the money needs to be paid for the insurance portion, which I’ll incur anyway because I need to get protection whether or not I’m on this plan. I trusted him and accepted his advice, but it was only later on that I realized there’s a cheaper way of getting the same amount of coverage which he hadn’t told me about.
I love MAS for launching CompareFirst because now I don’t have to go through any agents to get a quote anymore, exposing myself to be misled in the process.
My ILP policy protects me for $215,000 TPD benefit. I can get a similar level of coverage for much cheaper – AXA Term Lite is the cheapest in the market and will cost me $5700 instead. The $4747 I save as a result can easily buy me a trip to Paris, which I’ve yet to visit!
In fact, here’s something even better. Instead of giving away that $10k+ to get insurance coverage on this plan, I can easily get a $300k protection plan for even cheaper ($8550).
I then questioned the outcome if I were to invest in a stock yielding me the same level of returns instead. After running through the numbers, I realized that I would get back $179,687 through this method. On my ILP, I stand to only get back $63,7912.
Where did that $115,895 go to? (You should know the answer by now.)
Seriously, if I have to pay $115,000 for them to invest my money, I’d rather learn how to do it myself.
So that’s my full story of why I cancelled my ILP and decided to buy term, invest the rest.
I don’t know how many people will see this, but at least now the Internet has gotten one more resource from a consumer point of view why I personally think ILPs are the worst financial instruments ever created. The consumer, like what I’ve experienced myself, only stands to lose in almost every circumstance.
If you’re thinking of buying an ILP or know of someone who does, I hope this resource has helped you understand a little more. Unfortunately for me, I had to forgo 2+ years of premiums to learn this lesson because this didn’t exist before.