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"E-book" by AK

Second "e-book".

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AK talks to an expert on Investment Linked Policies, ILPs.

Monday, February 9, 2015

I was offered a chance to do a sponsored blog post on ILPs and instead of just the same old newsletter style or a cookie cutter interview, I decided to do it like a talk show.

So, we have AK, the host of the show, and a guest who is an expert in the industry taking questions from callers (who are actually my blog's readers). The questions were put forward by readers on my FB wall recently, in case you are wondering.

Anyway, here goes:

AK: Welcome to the "Accredited Kay Poh Also Can Show". I am AK, an accredited kay poh and your host for the show. With me today is Mr. Brendan Yong who will be doing all the work answering questions related to Investment Linked Policies or ILPs. Welcome to the show, Brendan, and let us start by asking you what are ILPs and how are they different from regular whole life policies, for example?

BY: In the case of regular whole life policies, your premiums (less commissions) for regular whole life (we call participating plans) along with others are collected into a "Life Fund", and the insurer is responsible to invest the premiums wisely,  to produce a return which is shared with the policy holder. Claims are paid out of this common pool in addition to other expenses.

For ILPs, your premium (less commissions, sales charges) buys into unit trusts (therefore the responsibility of investing lies with you). Periodically, insurance charges are deducted to provide the coverage stipulated by your insurance contract, other charges include: policy fees and management fees. Insurance charges rise with age. 

In other words, whole life policy returns are outsourced to the insurer. Insurance claims are deducted from common pool of invested funds.

ILPs investment returns and risk are borne by the consumer. ILP imposes insurance charges, which are deducted by selling units. Claims are paid by insurance company from another pool of Life Fund for ILPs and Term.

AK: Thanks for that clear explanation. Recently, when I asked my readers on FB what would they like to know regarding ILPs, I received a long list of questions. So, we would like to pick your brains here. Allen Allen asks "Is it advisable to take on ILP? I am currently having a ILP for 7 years and am considering to surrender it as I don't see it breaking even anytime soon." What would you say to that, Brendan?

BY: The main issue is ILPs are not suitable after age 55, as insurance costs increase exponentially. So if it was implemented thinking it covers life time for death, and critical illness, it is potentially a time bomb. If it's implemented for investment returns, you may be disappointed with the returns due to the high charges and fees. Every situation is unique, we have to compare the option of surrendering vs buy term invest the difference to give a proper recommendation.

AK: Sounds like Allen Allen might have to get in touch with his financial adviser after the show. Next, Spencer would like to know "What will happen once the mortality rate / cost of insuring is higher than investment returns?"

BY: The insurance charges are to be deducted from units by selling them. Imagine you are paying $3,000, after paying 5% charges, the remaining $2,850 is invested into funds. But your insurance charges at age 70 is say $8,000. Then you have to sell $8,000 worth of units to pay for the charges. Provided you have enough units to deduct, you coverage continues, while the accumulated fund depletes. If it depletes to zero, your cover is terminated.

Some agents say the returns will pay for the charges, but seriously, at the older age, you'll have to reduce the risk of the portfolio, settling for a lower return. So there is a high chance that it will start to deplete despite returns, due to the rising insurance charges. The effect will hit you after 55 ...

AK: That is quite a revelation! Older viewers/readers might want to take note! Next, Thomas asks "have u bought an ILP for yourself? If yes, is it a big portion (%) of your investment portfolio? And would u strongly recommend it to your spouse, and also to your parents? If so, did they buy it and what's their objections if they didn't."

BY: No ILPs for me. Not for my spouse, definitely not for parents (anyone above 50 is literally a mis-sell). Buy term invest the rest instead of ILP.

In my ebook, I mention only 2 situations it may still have some merit:

1) Newborn baby or very young kid. The long term plan is to cash in before age 55, making use of lower insurance charges when young.

2) Young working adult with little or no fiscal discipline. Same long term plan.

AK: Some very clear guidelines there as to when ILPs might make sense. Now, Gabriel wonders "if there are any ILPs which have beaten the STI index returns? Or has any ILP beaten the highest unit trust returns?"

BY: ILPs refers to the policy not the fund. So I would suppose the reader means the ILP fund. ILP funds are the same thing as Unit Trusts. There is also no sense talking about ILP funds beating Highest UT returns, as they maybe from different sectors, regions or asset type. There is no sense comparing any fund to STI, if the fund is not bench-marked against STI. A China/India ILP beating STI returns says nothing for the fund.

So allow me to re-phrase the question. Is there any difference between ILP funds and Unit Trusts? Has ILP funds beaten their index?

ILP funds are essentially unit trusts that are subscribed into by insurance policy holders. One advantage of ILP funds is the large pool of "dollar-cost-average" policy holders that will buy into the fund regularly, through good and bad time. This may explain some out-performance vs similar UTs. Let's take for example STI benchmarked funds:

NTUC Singapore equity invests 60%+ into STREETTRACKS STRAITS TIMES INDEX FUND, and manages the remaining portion. See that they just slightly outperformed STI (mainly due to reinvested dividends). Some attribution perhaps to Dollar-Cost-Averaging. 

AXA Fortress A Fund has consistently outperformed STI in fact by a large margin. Some impact may be due to dollar cost averaging, but most of it because of the capable fund manager: First State Investments Singapore. 

Finally Aberdeen Singapore is a pure UT. So AXA ILP outperformed, but NTUC ILP underperformed pure UT. 

Conclusion: Some UTs beat their benchmark, many don't. Some ILPs beat similar UTs with same benchmarks, some don't. At the end of the day, the choice of the fund can make a big difference. The short-coming is that ILPs may be sold and left alone, disregarding crisis or opportunities. It's the same issue with buy and holding UTs. This doesn't work. Even UTs that beat benchmarks need to be monitored for fund manager movement, and market cycles. 

I have many research on this area... working on another ebook... akan datang.

AK: Another e-book? I am sure you will be keeping me in the loop. Next, Lee Jiahui is "interested to know the market players income/revenue distribution/proportion of ILP products vs the traditional products".

BY: Unfortunately, there is no public data about this.

AK: OK, that was a fast one. Next person on the line is Derek Lim and he asks "What is your timeframe in holding a ILP? Is there a maximum age where you would advise against buying a ILP? Do you cutloss or do a fund switch if your ILP is doing badly? Similarly if your funds has done well, how do u lock in your gains? How do u balance between investment and coverage e.g. should I strive for minimum coverage and maximum investment?"

BY: Insurance charges rise exponentially after 55. So my time-frame is to cut at 55 if I'm holding to one (provided you have adequate cover from other policies). Anything above 50 is mis-selling. Any starts of regular premium ILP above age 40 is not cost-effective.

Cut-loss have to benchmark with buy term invest the rest to decide. In general most comparison will lead to the conclusion that BTIR is better. No manner of fund switching will solve the rising insurance charges problem.

AK: "Similarly if your funds has done well, how do u lock in your gains?" 

BY: Same with UTs, if some funds have "done well", you can choose to switch into bonds to lock it in. However you give up any potential upside. You can also switch into funds that have been beaten down severely, and buy them at a low price. This is one of the strategies that I teach investors who have little time to manage their UTs.

How do u balance between investment and coverage e.g. should I strive for minimum coverage and maximum investment?"

If ever I'm forced into an ILP, I will go for Maximum cover, min investment, and terminate before 55. If you are going for investment, forget about ILPs with "some" insurance coverage.

AK: So, I repeat, go for maximum cover, minimum investment and terminate before turning 55. Derek, I hope you are taking down notes. Next, Talen Blackburn Terence asks whether "ILPs are better than buying shares directly? Which are the better ILPs? What percentage of our salary should we invest in ILP? what % of our portfolio should be in ILP?"

BY: ILPs and UTs cannot be compared with direct shares. Totally different issue. To invest in shares, you will need: (1) some time, (2) a reliable method (e.g. Value Investing, GAARP, etc) (3) that works for your psychology (4) and accumulate experience over at least one complete cycle beating the STI index. If stocks work for you, stay with stocks. The only reason why some stock investors work with us, is to access bond funds. If you are not a good stock investor, you can consider UTs.

ILPs are same as UTs. So I rephrase the question: Which are better UTs? Answer: Whatever that's going to make good money for you in the next 5 years. If I had a crystal ball, I'll let you know.

What am I saying? "THERE IS NO SUCH THING AS THE BEST OR BETTER UT or ILP". You need a strategy to make some money in UTs. 

What percentage of our salary should we invest in ILP? what % of our portfolio should be in ILP?
None preferably, if he's talking about  ILPs.

AK: Brendan, if you manage to get a crystal ball that works, let me know. I only have a bowling ball and it is not very cooperative most of the time. Here is another question from Gabriel, "why are ILP costs so high while the returns are non-guaranteed? Are there any upsides at all for holders of ILP?"

BY: There is no why... That's how they are structured. The only remote upside I see compared to BTIR, is that term has a specific expiry date, ILP doesn't. Example you have a term cover till age 65 thinking you'll not need it when children are all grown up. If you had an ILP instead for the same cover, you can CHOOSE to continue beyond 65. Say you already have an early stage of Cancer, before 65. It might be a good idea to continue coverage ...

Having said that, if you design your insurance portfolio well, you should have some other option to fall back on like a 99-year Critical Illness cover or a Living-type Policy.

AK: That is a good point on how ILPs might be a positive for certain people. OK, The next one is a biggy or several biggies from long time reader, Jimmy Ng. Buckle up or you might fall off your seat. Here comes the first question, "Why are distribution cost & expenses so high that it take a very long time (i.e. over a decade), on projections of guaranteed & non guaranteed, to break even, let alone generate positive returns?"

BY: There is no why... That's how they are structured. Insurers have costs. They calculate that this is how they can still make some profit after giving out commissions.

Instead of asking why, just compare the alternative and make a decision.

(1) Can I afford not to be insured? If Yes, at least have a good hospitalization plan. If you cannot afford not to be insured, but you still don't want any: eat healthily, exercise, hope you don't have bad genes and pray.

(2) If you want to insure adequately, use a competitive term insurance to cover Family Dependency Needs, and a Living or 99-year term to cover Critical Illness. Compare this option with ILP if you must.

AK: Is there any low expense version of ILP ?

BY: Not significantly. Even the cheapest may not compare well with BTIR. Between insurers, ILPs can differ A LOT!

This was from The Straits Times:

AK: How does the insurer split shared costs - like overheads - between the policyholders' and the shareholders' funds? How can a policyholder know if the split is fair?

BY: You might want to visit this site: http://www.moneysense.gov.sg/understanding-financial-products/insurance/types-of-insurance/life-insurance/types-of-life-insurance/participating-policies.aspx
Shareholders can only take a maximum $1 for every $9 distributed to policy-holders, this is regulated.

Other than that it's totally insurer's discretion. It's a free market. If their product is not competitive, they can't get market share.

You have a choice. So, explore the alternatives.

AK: In the Singapore context, can the ILP gives similar or better returns than CPF OA & SA ?

BY: ILPs = UTs. Yes, if the market allows. Yes, it you hang on to it for 20 years. Yes, if you employ a good strategy. No if you choose the wrong fund. No if you are expecting it to do wonders within 3-5 years.

AK: Will it be street smarter to buy a term policy getting the same mortality coverage of ILP and invest the rest into ETF or REITs or AK Investment fund (Jimmy's words, not mine)? My feel is that the returns from these investment could generously help to pay for the term insurance cost, do you agree ?

BY: Yes, generally speaking. Still... shop around. Term insurance rates can differ by 20%.

AK: What determines the Premium Allocation, Insurance Charges, Policy Fee & Funds Bid-Offer Spread ? Are these charges fair to policy holders or could be significantly reduced ?

BY:  Let's not visit the fair issue again... The market will drive charges. One insurer cuts Bid-Offer spread or Premium allocation and comes up with a super competitive product, the rest will have to change soon. The Law of Economics will take care of excessive profits.

AK: What can be done to reduce the premiums & expense payable while increasing the coverage and ROI ?

BY: Nothing. Make a decision: (1) Cut-loss, replace with BTIR or (2) decide to hold and surrender before 55. Increasing Coverage and ROI cannot happen at the same time. It's either one of the other.

AK: Brendan, you have answered all of Jimmy's questions but we are not quite done yet. Just a few more questions from other readers to go. Elvin wants to know "If I suck at money management and am not savvy.. Is the ILP the right product for me? Does the ILP give me a peace of mind in terms of financial protection and is my capital guaranteed while receiving coverage? Are there embedded risks in ILPs?"

BY: If you suck at money management, go and learn. No one will be more responsible about it than you. If you REALLY cannot manage, and have poor fiscal discipline, then maybe you'll be better with ILP off than nothing at all. Risk are the market risks, capital non-guaranteed. If you want some guarantee, buy 99-term or a traditional living plan.

AK: Next, Kenji asks "how do u make money from ilp when u r in a losing position now?and is switching fund the only way?"

BY: If you are talking about a Single Premium ILP, meaning it's not a monthly or yearly premium plan, then SELL the ILP, buy an equivalent UT or in a potentially better one. You'll recover it faster because of the ILP charges.

AK: Jieren Azrael Zheng wants to know if it makes more sense to buy a similar or underlying ETF instead of an ILP?

BY: I think we are talking about single premium again. Yes, UT or ETF is better than ILP.

AK: Clement Wong wants your opinion on his 3 year old ILP. "i bought an ILP 3 years ago without knowing any better. how now brown cow..."

BY: Evaluate vs BTIR. Make a decision. Consult a proper financial planner before doing anything.

AK: Zaw Oo asks "Given your current knowledge, would you encourage anyone to take up ILP as a form of long term investment?"

BY: flat NO.

AK: Very emphatic! GW Samzel says "I own both Golden Regional China Funds and India Equity Fund from Manulife and it seems like my current buy price is always higher than it's sell price (selling a fixed amount monthly as charges for the policy). Even though the chart is slowly going up (it's only been 4 yr since I got the funds), high buy price is forever higher than sell price. Would i really make any gain eventually? Also, how do I evaluate that these 2 recommended funds by my financial planner is really the most suitable fund she could offer for me?"

BY: Buy is always higher than sell due to bid-offer spread of around 4-5%.

How to evaluate a unit trust ... (perhaps that's the title of my next ebook) ...

Step 1: Go to https://www.dollardex.com/SG/?current=investUTgraph/home&previous=investUTgraph/home
Unselect show funds only sold at DollarDEX, so that you can see all funds (even so some are not listed on DollarDex)

Step 2: Click and Select funds to compare:

Step 3: Decide: cut ILP, buy equivalent UT or something else
How to determine if you insurance agent or financial planner is competent to advise you on investing UTs:
1) Did they make their wealth (significantly) with UTs?
2) Have they gone through one full economic cycle?
3) Can they answer questions convincingly about markets, fund characteristics etc?
4) What is their strategy and rationale of fund selection?
5) Do they only look at performance ? And only last 3-4 years? 
6) Did they show you how bad it can get? The downside?

AK: Brendan, I really like these 6 questions that you have listed. Very telling! I want to thank you for patiently answering all our questions and, to all my readers, if you would like to have a copy of Brendan's e-book, go to: https://ut200.isrefer.com/go/ILPTB/sgstock/

Remember, nobody cares more about our money than we do. So, take charge and ask questions. Make sure we understand what we are getting ourselves into each and every time. If we don't understand something, walk away. Don't commit.

With that, the show has come to an end.


yeh said...

Me n my hubby bought ILP from ntuc. I think the fund name Called ntuc growth fund. Do not really know what is the component of the fund.

We bought since end of 2008 till now. Monthly 770 for 2 person ( me 380 hubby 280) . I take this as a form of saving.

Till now, we have earn about 13k.
I wonder should i sell it? Since it is on profit now.

or just let it to roll. We are still paying 770 monthly.

Any advice. Thanks.

AK71 said...

Hi yeh,

I have asked Brendan to check the comments section of this blog regularly to help answer questions from readers. I think you want to hear from an expert like him, not me. ;)

Phileas.Wind said...

Thanks for the good article. I think it's talking sense with good examples.

la papillion said...

Thanks brenda for patiently answering all the q. Very enlightening.

victorlsl1 said...

great post!

Derek said...

Hi AK,

Thanks for the detailed interview. I will buzz you separately as this article will be very useful in my resource page.

It confirm my suspicions that ILP charges after age 55 will increase exponentially.

So BY advocates buying ILP for maximum coverage. In that case, less money will be channeled into investment and one will have to look at a very long investment horizon of at least 20 years. This means that ILP is not suitable for anyone 35 and above.

IMO, a better alternative to ILP is to buy term and a Unit Trust. Agents should not say that ILP removes the hassle of having to do your own research because you still need to do your homework to choose your insurer, the coverage/investment account and the ILP funds. You also need to constantly monitor it.

AK71 said...

Hi Derek,

If we cannot be bothered to do our research and outsource that to someone else, if we were to lose money, who should we blame? ;p

Of course, some of us bloggers have attempted to share what is correct with anyone who is willing to read. Let us hope that we are able to reach many more. :)

Brendan Yong said...

You were luck it was a good timing, when the market crashed you were buying units.

If it has very low protection amount, and your intention is to use it to invest, then pure UT is a better option.

If there is a high protection sum, you can decide: (1) replace with BTIR or (2) hold till 55.

Pls consult a competent financial consultant before terminating any plan.

Matthew Seah said...

Hi BY,

You have shown that 3 STI benchmarked funds have outperformed the STI. You also mentioned that the 3 funds have reinvested dividends.

Since STI itself do not take into account dividend reinvestment, it will not be an apple to apple comparison.

So, how will dividends reinvested into STI compare to these 3 funds?


Brendan Yong said...

Regarding fund performances, there are some other research done by other bloggers:




Likely AXA Fortress outperforms by a big margin. NTUC might be borderline.

There are a majority of Singapore Equity UT that can beat the index dividend re-invested. In fact there are many Asian equity fund mangers that also outperform their index.

The conditions for Asian fund managers to do so is asymmetrical information. Simply put there are info that fund managers can use to beat the market, be it fundamental data, or insider knowledge.

Research that says 90% mutual funds under-perform the market, comes from USA, where it's a much more matured, highly traded market, where there is much more competition between fund managers, hence eroding advantages of information.

As retail investors in US, it's also alot easier to get fundamental data, and easily screen for stock criteria like ROE, or Free-Cash-Flow unlike here in Singapore/Asia.

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