• Daniel Lee

The numbers you never knew about ILP, Whole and Term life insurances.

Updated: Dec 21, 2019

Let me start this article by saying, I am NOT a fan of traditional investment-linked policies (I’ve written about my reasons here).


In the midst of working on one of my client’s insurance planning, I realize something interesting which motivated me to share the findings.


As such, I am writing this article purely for information purposes only based on numerical figures generated from my client’s profile, which is as follows:


1) Age: 25, Male, Non-smoke

2) Yearly budget: $2,400, anything not used for insurance will be invested

3) Yearly premium of policies:

  • ILP: $2,400 renewable yearly

  • Term plan: $875 payable and coverage till age 75

  • Whole-life plan: $2,100 payable till age 50

4) covers for life Death / Disability / Critical illness coverage: $300,000


Be informed that the analysis is heavily subjected and limited to the variables used.


The most significant variable is that my client is young – age 25 – and hence has a longer investment horizon.


Given a different set of variables, say an older profile, the results may be significantly different.


Let’s get started.


For starters, let us take a look at how an Investment-Linked Policy behaves – in terms of the cost of insurance and the amount that is invested at the end of the day.

Unlike whole/term life insurance from which the insurance cost is fixed at the age of entry, the cost of insurance for ILP increases every year based on your age.


As a result, the amount left/invested after paying for your insurance costs decreases every year.

This is the first reason why I am not a fan of ILP. From an investment practitioner perspective, it is impractical for anyone to implement a proper investment strategy with such an unfavorable policy behavior.


As such, the use of ILP as an investment vehicle may results in a higher likelihood of poor performance due to the difficulty in implementing and managing your investments.


However, as the cost of insurance for an Investment-linked Policy is considerably cheap as compared to both term and whole life insurance (at least in the earlier years), Investment-linked Policy enables the policyholder to accumulate more wealth in the earlier years.


This feature of ILP is what made it so attractive – purely from a numerical standpoint.


The effects of accumulating more in the earlier years are drastically amplified by the principles of compounding.


The principle of compounding can be explained in the following chart or if you need more explanation you can visit here.

Now, because of the effects of compounding, IF we were to compare the difference in outcome for ILP, whole-life and term life insurance over the span of 50 years, we will come to a surprising realization. (at least I was surprised by the facts)


If you were to make 0% on your investments:

Let’s imagine a scenario where you screwed up (more common than you think).


If you made no returns from your investments, here’s what you can expect to receive from your $2,400 spent on insurance and investments overtime:

Before age 60, we start to realize that the use of ILP provides the highest portfolio value when compared against the use of whole-life or term-life insurance policies and investing the rest.


However, beyond the age of 60, the use of whole-life insurance provides the highest portfolio value as the portfolio value of the ILP is eroded by the exponential increase in the cost of insurance.

If you were to make 3,5,7% on your investments:

If you were to make anywhere between 3-7% investment return a year, the use of ILP will still provide you with the highest portfolio value before age 60.


However, beyond age 60, the cost of insurance of an ILP will erode your investment portfolio, resulting in lower portfolio value.


When extrapolated till age 75, the difference between a buy-term-invest-the-rest and an ILP can be as much as $150,000 to $300,000.


What is so surprising about the findings

With so much negative connotation and reputation revolving around traditional ILP, it appears that the purpose of a traditional ILP, as a financial instrument, seemed to be lost over time.


By looking at the numbers – at least from a young profile – my take away from the findings is that traditional ILP may be a good instrument for anyone looking to be insured over a pre-determined period of time while wanting to invest more in their earlier years.


Once again, this entire analysis is only one side of the picture as we’re only basing our findings from extrapolating the numbers from a purely theoretical standpoint.


In terms of actual implementation and the qualitative practicality of using a traditional ILP, it may not be a suitable choice of instrument to fulfill your insurance and investment needs.


Even after this analysis, my views have not changed and that is:

I am not a fan of traditional ILP and I strongly believe that insurance and investment should be separated for proper financial planning.

Now, this information in this article should by no means be interpreted in a way to try and identify the “superior” insurance/investment planning approach as there is no such thing as a one-size-fits-all strategy be it for insurance or investment planning.


I made this article because I realize this information may be useful to people who may have already bought a traditional ILP and is thinking of surrendering or restructuring their insurance portfolio.


If you are currently facing difficulties with your insurance planning, perhaps you can reach out to me here and we’ll see what we can find based on the analysis of your current insurance portfolio.


Moving forward, I will be publishing more articles relating to the topic of investments starting with a review of the historical fundamental behavior of both the global and Asian economies. (currently still cleaning the data)


Subscribe to the blog and be informed about the release of future articles! Happy holidays.

Disclaimer:

This article is meant to be the opinion of the author and is for information purposes only.

This article should not be seen as a financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore.

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