Frightening Truth about Investment-Linked Insurance Policies

Last month, the Monetary Authority of Singapore (MAS) launched compareFIRST with Consumers Association of Singapore, Life Insurance Association of Singapore and MoneySENSE. compareFIRST is a portal that contains information on life insurance products offered by all the life insurers in Singapore. However, way before the website was launched, last year, SG Wealth Builder had an opportunity to meet up with Brendan Yong, of

Unlike me, Brendan has worked in the financial industry for 11 years and is a veteran when it comes to insurance matters. Nevertheless, both of us shared the same belief that insurance is a form of protection, and never meant for investment purposes. In that meeting, he revealed a frightening industry secret on investment-linked insurance policies.

When touched on the topic that there was an initiative by MAS to promote online direct purchase for insurance products, Brendan chuckled and commented “Of course I knew that as I work in the industry. As a matter of fact, MAS had a round of consultation with the industry players on the proposed move”. However, Brendan dismissed that such a move reflected that consumers are ready to purchase insurance products directly from the insurers.

He shared that financial planners and insurance agents still has a role in helping consumers in making the most informed choice when it comes to buying the most suitable insurance products.

Brendan Yong

“Look Gerald, basically you still need insurance agents and financial planners to advise you on how the insurance product works and whether they are suitable for you or not. There is no way to know all the nuances and details from the website without someone explaining in details what does each feature entails. Furthermore, the way an applicant declared his health status is also important and can affect his insurance application or even coverage. So moving forward, insurance agents and financial planners would still have a role in aiding consumers and technology can never replace this human touch.”

Deep in my heart, I agreed with him on this point wholeheartedly because more than 10 years ago, when I applied for a private shield plan for my late father, it was rejected on the premise that he got high blood pressure. Hence, he was deemed too high risk to be covered by the insurer.

Brendan went on to share that his concern was not competition from direct purchase, but rather Singapore consumers making the wrong decisions when it comes to purchasing insurance policies. He revealed that many Singaporeans were led into buying investment-linked insurance policies that were not meant for protecting the financial welfare of the policy holders and he even described these products as “time-bombs”.

In addition, he also added that Mr Tan Kin Lian, ex-CEO of NTUC Income admitting “ALL ILPs are bad”. Sound sobering but just how bad are investment-linked insurance policies? Personally for me, I had been approached by many insurance agents to buy ILPs before but I had never buy one because I don’t really understand the mechanics of such products. Brendan patiently explained to me how ILPs work.

Traditional life policies pool premiums from policy holders and injected the fund to a fund manager who will then invest in a portfolio of stocks and bonds. Expenses and claims are then deducted before the profits are distributed to holders in the form of declared bonuses. Usually, the credit rating for the industry is $1 per $1000 sum insured, plus 1% per year. Once declared, the bonuses cannot be reversed and hence over time, the cash value will gradually build up.

Investment-linked insurance policies work differently as the premiums are used to purchase unit trusts instead. In the first few years, not all the premiums are channeled to buy unit trusts but instead used to cover distribution costs. The remaining fund is then used to buy unit trusts, less sales charges typically 5%.
The most important thing to note is that insurance charges are deducted, along with policy fees, by selling units, on a monthly or yearly basis. The most outrageous thing is that the insurance charges do not increase linearly over the years, but exponentially. What this means is that the policy holder may face the situation of having to top up his policy to pay his insurance coverage because the units in his policy might have all been deducted to zero.
After listening to what he told me, I felt sicked in the stomach. How can people conjure such a way to make money? Brendan shrugged off and reiterated that there would always be black sheep every industry and investors must always stay vigilant, otherwise, they might lose ten of thousand dollars. The worst thing, he emphasized, is discovering the painful mistake when crisis happens or during the twilight years when you need the fund for retirement.

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Magically yours,

SG Wealth Builder

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