Hi Fellow Automated Millionaires,

After a short chat with a friend, I come to realised that most of my friends do have at least one Investment-Linked Policies (ILP). Looks like most people are sold on the idea of ILP is good for them, espeically there is a Protection component yet there is also an Investment component! Is ILP that good? Facts don't lie, hence let us see...

Advantages of ILP
According to my own research, ILP generally have the following benefits: Potentially high yield (especially hold to mid-long term), Liquidity (having the ability to cash out when in need of money), Flexibility to change his/her protection and investment focus depending on his/her situation and lastly, Policy owner is able to change his/her amount of premium paid for the ILP depending on his financial status. On top of that, normally it also accompanied with a few free switching per year. Generally speaking, on this few benefits, it is relatively a pretty good plan to achieve both fish and bear's hand (in chinese there is a saying of You cannot have both fish and bear's hand).

The Mechanism behind ILP
To explain ILP in plain facts, part of the premium paid on a monthly or annually basis will be used to pay for protection which usually includes protection against death and critical illnesses. The rest is invested in the funds. The accumulated profit will be used to pay for the cost of protection in the later part of the ILP.

What The Straits Times have to say
It was stated in The Sunday Times dated 27 Feb 2005 that...

There is no certainty as to whether the value of ILPs will rise over time, since they are invested in market instruments such as stocks and bonds. therefore, there is a risk that the accumulated value of units would be insufficient for unit cancellation in the later years. Insurance coverage in a regular premium ILP is typically not guaranteed.

This is a BIG NO NO for people with the purpose of getting ILP for protection. The keyword is NOT GUARANTEED. Why gamble with one's life protection? You don't see people gambling with insurance of their property? They get paid the full amount of the stated value of the property if anything drastic were to happen. So are we protected on how much are we worth? :)

The Sunday Times also added this caution about Fee hikes pertaining to ILP...

ILP mortality and critical illness charges are often not guaranteed and insurers have the right to increase these charges in the future. Should both premiums and investment units be insufficient to meet protection costs, policyholders may be advised to top-up the premiums to keep the same level of coverage, or reduce insurance coverage. In the worst scenario, if the policyholder does nothing, the policy will lapse prematurely.

Wow! Most people aren't informed of this when making a decision, therefore resulting in purchasing an ILP - thinking that the investment portion is good enough to protect oneself's interest. However, investments are never guaranteed and so are the mortality and critical illness charges! This is the main reason why we always recommend pure protection plans like Limited Premium Whole Life for our friends.

So What about Investment / Wealth Accumulation?
If a person is really wants to become an Automated Millionaire using leveraging of Dollar Averaging Cost through Regular Savings, one should invest directly into fund house through investment platforms e.g. iFAST. This is where your dollar put into investment will compound as an dollar rather than a portion goes into mortality charges and another goes into critical illness charges before going into investment for compounding.

What Now?
Well... does it mean that ILP is not for everyone? Not necessary true, it really depends from case to case basis but most of time, we won't touch ILP for the benefits' of our friends :) So what do you think?

Yours Sincerely,
Max Tay - The Automated Millionaire

FYI: We are not touching on Single Premium ILP as it doesn't leverage on Dollar Averaging Cost when comes to investment