Are you getting your dollar's worth with ILPs?

Premium allocation for the various Investment Link Policies in the market:

Note: The figures may not be a 100% accurate

The table shows the Premium Allocation into the various investment funds. In most cases, your
monies are not fully invested for the first few years and if you ask me, the first few years are crucial to the kind of explosive growth that we seek, which I will address later on in this post.
Not only that, there’s also the escalating insurance costs.

So unless you subscribe to the “Live Longer, Pay more” policy then I would reckon ILPs is not the way to go.

For instance, the mortality charges for one of the above mentioned ILPs are as follows.
Example:
Insurance charges for a policy with the following coverage:
Death and Total permanent disability coverage of $100,000
Critical illness coverage of $100,000

So for 30 year old policy holder, who pays $100 premium a month, $18.86 would go to servicing the insurance charges but for a 55 year old, he would need approximately $128.52 to cover his insurance charges and its unlikely that the client would want to come up with more cash at this point of time, so this would lead to eating up into his portfolio’s value.

Another thing about ILPs is that the choice of funds that you're invested into is unlikely to change once the sale has been made, yes one would argue that the investing is a long term thing but i don't see a point of staying on board of a sinking ship.

The point I’m trying to make is that insurance agents are very unlikely to make changes to your funds even if it is not performing, as they all earn their commissions mainly from the first few years of the sale, so I don’t see where they would get the motivation to look after your portfolios.
Even if they would like to add top performing funds to your portfolio, insurance companies have a constraint of a limited fund list, of which contain only a few with a good track record.

A much better option would be to invest in an Investment administrator and there are currently 3 IAs in singapore. They are iFast, Navigator and Phillip Capital, there is the better service and economic reports plus the extensive lists of funds which IAs offer.

Example of costs:
Instead of losing the whole chunk of your investment in the first few years, there's cap on the one time charge/brokerage fee of up to 3% of your investment capital.Which means to say about 97% of your hard earned money is invested and also there's a yearly management fee of 1.25% for servicing your portfolio.

When it comes to growing your wealth, the key is compounding.

The magic of compounding is that initially the returns you see may not seem like much but if you were to view it graphically over time then the returns you see starts to explode off the charts.

Graph shows an intial lump sum investment of $10,000 compounded at 10% per annum. If you notice it takes 25 years to hit the first $100,000 but within the next 6 years you should see your next $100,000 and by the 40th year you would have gotten returns of almost $500,000!

Imagine missing out on the first 5 years of your investment growth because of the fact that your hard earned money is not flowing into your portfolio but into the hands of insurance companies and agents! Imagine missing the 1st 5 years in the above graph, that would leave you with $300,000 instead of the $500,000!

IAs charge a management fee but if a 1.25% management fee helps to give me steady returns then in my opinion that would be the better alternative. Many may argue that 1.25% may be costly and they would rather purchase their own investment funds via ETFs but only if you’re savvy and you know what you’re getting into.

Do take note that when it comes to ETFs, you will need to pay the brokerage fees again when you decide to sell. So unless you do don't plan to switch in and out of ETFs, the fees will be lower than unit trusts.

The fees for ETFs are similiar to the trading fees: Up to 0.28% brokerage fees+ Clearing fees+ SGX fees+ GST for every transaction.

Having your money in an IA would give you unlimited switching and freedom when it comes to buying into whatever you fancy, be it sovereign funds, sectors, index funds and you’ll have a consultant who can give you the house view on these areas that interest you.

Well i hope the following information will aid you in your investment decisions. If you'd like to share with us your views or would like to speak to us, just send us an email or join us at our up coming seminars. Happy investing all.