Knowing the difference between Investment-Linked Policies (ILPs) and Whole-life Insurance can protect Singaporeans from investment risks or insufficient coverage.
Insurance products are complex financial instruments that most Singaporeans do not easily understand. Investment-Linked Policies (ILPs) and Whole-life Policies are two of the most common insurance products in Singapore. Because they have similar features, it is easy to mistake one for the other.
Both plans offer protection against specified conditions, they both require payment of premiums, and both types of policies help you accumulate a cash value. To add to the confusion, an ILP is classified as a type of whole-life insurance plan.
However, a peek under the hood will reveal that both ILPs and Whole-life Policies are very different machines, and should not be used interchangeably. Before we go into the nitty gritty of why, let’s take a closer look at the differ ILPs and Whole-life Policies.
What is an Investment-Linked Policy (ILP)?
An ILP is an insurance product that invests your money in the market, with the intention of giving the policyholder higher returns.
ILPs also offer monetary benefits that are paid out should specified events occur. These events are pre-agreed between the insurer offering the policy and the individual who signs up for it. (You may recognise this as a classic function of insurance.)
Because ILPs are sold by insurance companies, it is often possible to add riders that boost insurance coverage, or extend the scope to events not previously included.
ILPs are positioned as products that provide the highest potential returns out of all the insurance plans offered. As such, they are most commonly marketed as a good way to grow your money.
What is a Whole-life Policy?
A Whole-life Policy is an insurance policy that covers an individual against specified events for the duration of their lifetime (which can mean up till 99 years old, or until death).
Whole-life Policies come in two forms – participating and non-participating.
In a participating Whole-life Plan, premiums paid are allowed to be used in a fund, which invests in traditionally low-risk instruments such as government and corporate bonds, equities and cash.
Returns from this fund are non-guaranteed, but any gains are paid out in the form of bonuses and dividends. As a result, a participating Whole-life Plan can offer decent returns, and some insurers highlight this as an additional selling point. (You can potentially get a much larger sum at the policy’s maturity).
A non-participating Whole-life Policy, on the other hand, does not offer bonuses, as the premiums paid are used solely to pay for insurance costs. Because of this, non-participating Whole-life Policies have lower premiums.
What is the Difference Between an ILP and a Whole-life Policy?
The difference between an ILP and a Whole-life Policy lies in the way your premiums are used.
ILP vs Whole Life Policy
Features of an ILP
Features of a Whole-life Policy
In a Whole-life Plan (or any other ‘true’ insurance plan), your premiums are used to pay the costs of insurance. In other words, you are paying the insurer for them to bear the financial costs of a catastrophic incident happening to you.
However, in an ILP, the premiums you pay are first used to buy fund investment units. These units are then sold to pay for the costs of insurance, as well as brokerage, admin and other fees.
Because of this difference, in an ILP, you are not paying your insurer for insurance – you’re paying them to invest your money, which is then used to offer you insurance coverage.
Put another way: ILPs are not insurance plans with an investment component. Rather, ILPs are investment plans that happen to offer coverage in ways similar to an insurance plan.
Are ILPs Bad Products?
Neither ILPs and Whole-life Policies are inherently good nor bad. Just like with any insurance plan, you should understand carefully what your needs are, and whether a plan helps you fulfil that need or not.
However, it should be noted that ILPs have had several criticisms levelled against them, notably for charging high fees, relatively more expensive insurance costs (you get lesser coverage dollar-for-dollar) and inconsistent or worse-than-expected returns.
Without launching into a whole other essay examining the root causes of these criticism, or whether they are valid, we will say that the way insurers market ILPs as insurance plans is a major contributing reason.
Our recommendation is to be 100% clear about the pros and cons of any insurance policy you are considering – whether a ILP, a Whole-life Policy, or any other plan. This means that when you meet an insurance agent, you should grill them thoroughly on the product until you are crystal clear about what you are being offered.
How to Spot an ILP or a Whole-life Policy
Before buying any life insurance plan, you need to know if you’re getting an ILP or a whole-life policy. Use these telltale signs to spot the difference between the two.
Absence of Guaranteed Cash Value
When presented with a Benefits Table (a mandatory document that shows you how much money your plan is expected to pay out), look for a ‘Guaranteed Cash Value’ component. If you don’t see one listed anywhere, you’re looking at an ILP.
ILPs do not provide guaranteed cash values because they are completely dependant on the performance of the funds your premiums have been invested in. Hence, the returns you get are based on the performance of the market. This also means that ILPs carry investment risks.
On the other hand, a participating Whole-life Policy will have a guaranteed cash component. This sum increases the longer you hold your plan, and will be paid out upon the termination of the policy, along with any benefits entitled.
(A non-participating Whole-life Policy doesn’t provide any guaranteed cash value either. If one does, the cash value is likely to be very little.)
High Projected Returns
All insurance plans that promise to give you returns (aka ‘participating policies’) will show you their Projected Rates of Returns (PRR). These are tiered differently for different products.
Among the various plans sold by an insurer, ILPs offer the highest potential returns. As a result, they are allowed to communicate a PRR of between 4% to 8%. (This is the prevailing range set by the MAS, and could change in time).
Because of the higher PRR, and the option to hold the policy for your lifetime, ILPs will also display some shockingly high returns; it is not uncommon to have ILPs list figures crossing the S$1 million mark.
So, if you see high PRRs (up to 8% presently) and ridiculously large returns, know that you’re dealing with an ILP.
On the other hand, Whole-life Policies display lower PRRs. The prevailing range is between 3.25% and 4.75%.
Choice of Funds
This is the most obvious sign of an ILP.
Somewhere along the application process – most likely during the final few steps* – you’ll be asked to pick a fund to invest in. If you’re not looking to sign up for an ILP, you should put down the pen and not proceed any further.
ILPs work by using your premiums to buy units in funds. As such, it is mandatory for insurers to get you to choose a fund to invest in. Your agent may give their recommendations, but you, the client, must make the final choice.
If you see no sign nor mention of funds (index funds, mutual funds, equities, debt, etc.) all the way up to the final page of the application, then you will know you are looking at a Whole-life Policy. Or at least, not an ILP.
* Why is the choice of funds only presented to you late in the application process? Because many insurers sell their ILPs as insurance plans. Hence, introducing the idea of investing in the market early on in the sale tends to confuse prospects, and confused prospects feel uncomfortable proceeding.
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By Alevin Chan
A Certified Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimise happiness and enjoyment in his life.