Beware of Investment-Linked Insurance

Beware of Investment-Linked Assurance Scheme(ILAS)

Investment-linked assurance scheme (ILAS) is frequently promoted in different media by insurance professionals. ILAS is a highly complex product with an opaque fee-structure and is not suitable for most people. Unfortunately, it is being marketed to the mass along with complicated concepts like premium financing.

Layered Fees

An insurance policy should primarily focus on risk protection. To bundle investment and life insurance together will increase risks and uncertainties and is totally opposite to the concept of insurance protection. Since investment involves market risks and along with layers of fees(fund management fee, policy administration fee, account maintenance fee, portfolio management fee, insurance cost etc.), it is difficult to forecast the value of the policy and how long the policy can last.

Anywhere between 10-20% and could be even more(depending on different insurers) of your total premium paid will go to the insurance companies first, and that’s before the annual administration fee, life insurance cost and fund management fee etc.! The only parties guaranteed to benefit immediately are its sellers – the insurance companies and the people who sold you the policies.

You should ask those who recommend these products what is the breakeven return needed each year just to cover all the required fees.

Life Insurance cost may cause the policy to lapse

ILAS policies can be bundled with different degrees of life insurance protection. You might not need the life insurance protection as you become older but the increasing insurance cost will still be deducted every year, eroding the cash value and lapse the policy.

Lack of Liquidity

Most of these policies have a long contract period and long lockup period with early withdraw or surrender charges. Since much of the premium paid in the early years will first go into fees to protect the bottom line of the insurers before it starts working for you.

Wide selection of Fund Choices

Many ILAS schemes offer over 100 funds and advertise that you can switch funds for free – that is after all fees above in addition to the high(>1.5%) yearly underlying fund level fee already factored into the price of each fund.

The turnover of the funds in each scheme can be high as insurance companies may replace poor-performing funds with best-selling/hot funds.

Some suggest they can offer professional advice to help manage funds to avoid market volatilities. Do you believe anyone can consistently predict market cycles?

Conclusion

An insurance policy should ideally be simple and straight-forward such as term-life, savings, personal accident or medical etc and should not be influenced by the uncertainty of market fluctuation and investment decisions.

Beside its complex fee structure, if the ILAS policy is bundled with life insurance, the increasing cost of insurance might erode the cash value of your policy faster than expected as you age.

For just investment purpose, you can consider MPF special voluntary contribution(SVC). While MPF fund selections are fewer than ILAS, the underlying fund level fee is the only cost required and there are many low-fee funds(<1%) in the system. While performance can never be guaranteed, it is paramount for investors to keep costs down and leave more capital to compound for you over long term.

MPF system has the long term well-being of its member in mind when compared to ILAS. Most insurers also provide MPF service and I encourage you to ask them about using MPF SVC for investment purpose.

It is reassuring that the Securities and Futures Commission (SFC) issued a circular in November 2021 to tighten regulation on ILAS products and require issuers of these products to increase fees transparency and simplify product complexity. I hope this will raise awareness among general public to be more alert of these products.

Latest update: 14th July 2022