Practice English Speaking&Listening with: 4 Reasons to AVOID Investment-Linked Policies (ILP)

hey and welcome to Sethisfy youtube channel in my channel we talk about personal finance

money and saving money by not buying scratch toys for your cats

today we're going to talk all about investment linked policies and if you don't already know what

i'm going to say about it spoiler alert you should probably avoid them investment linked policies or

ilp as the name suggests combines investment as well as insurance together in one policy so it

sounds like a good idea right we need insurance we also need investment hey why not get something

that does both now there are few types of ilps and i think they can be broadly classified into two

different categories one regular premium ilp and two single premium ilp regular premium ilps tend

to have a significant focus on insurance whereas single premium ilp has very minimal insurance

component usually 101 percent death benefit which is why they are also called 101 ilps today we're

going to talk all about regular premium ilps and why you should actually avoid such policies the

number one reason why you should avoid such plans commissions again commissions is very high in a

regular premium ilp just like long-term savings plans which i covered in the previous video

ilps have very high upfront commissions and this eats into your return in the long run

the high commissions are reflected in the low allocation rate of the regular premium ilp

so if you notice in the ilp for the first year usually the allocation rate is something very

low like 0 to 20 percent so if you buy an ilp of yearly premium three thousand dollars only a

few hundred dollars are invested in the first year and the rest go to paying your agent's commission

oh let me correct myself it goes to paying distribution cost which is then used to pay

commissions as if there's some kind of difference and just like a savings plan as much as two years

of your premiums go towards paying distribution costs again distribution cost is used to pay for

commissions and incentive trips that your agent enjoys and the high commissions are made worse by

the fact that it's incurred at the start of the policy which means you're actually losing a lot

of time value of money so again if you're putting three thousand dollars per year into such a policy

there's about five to six thousand dollars of upfront fees that could have compounded for a

long time horizon of 20 30 years at i don't know six to seven percent that's a lot of money lost

so again if you buy an ilp i hope you like your agent a lot because he or she is going to like you

a lot better now there are some ilps that say hey we'll give you bonus units so you won't actually

have only 20 percent allocation rate in the first few years now bonus units may sound good but do

you think that the commission on these plans are any lower now think about it the insurer cannot

possibly give you high bonus units the agent high commission rate and still make its profit off the

policy that they just sold to you it's a zero-sum game meaning to say every dollar put in has to be

divided across you the insurance company and the agent and trust me their cut is not reduced by

such an arrangement such a policy will recoup all its bonus units through a variety of fees

fees and fees and if you ever think of terminating earlier you guessed it termination penalties which

brings me to my second reason why you should avoid such policies fees now incredibly apart

from high commissions you also have high fees and yes those are different things when you buy

an insurance product you typically have to pay insurance related charges like distribution costs

and when you buy an investment product you usually have to pay the sales charge

and other investment charges now that's fair but for ilps you're actually double paying both

insurance charges and investment charges on the whole lot so let's say your budget for investing

in interest is three thousand dollars a year and you choose to buy an ilp to settle both what

happens is that the distribution cost is applied to all three thousand dollars of the annual

premium so the few hundred dollars that's left is used to buy investment units which are then sold

to pay for assurance charges which is the cost of insuring you so you're actually double paying fees

your insurance side of things are being subject not only to insurance charges but also investment

charges and then the investment side of things are not only subjected to investment fees but

also insurance fees how does that make sense imagine going to mcdonald's and buying a meal

and then it's more expensive than if you bought the drink the burger and the fries separately and

for ilps that offer bonus units there are policy fees admin fees maintenance fees account fees

lots of fees that will eat into your returns in the long run and as with every ilp i've

seen they're invested in funds with high annual management fees which will eat into your return as

well now the third reason is that an ilp actually has escalating assurance charges as a person grows

older what this means is that as a person grows older and older the amount of assurance charges

being deducted from the investment units gets more and more in an exponential manner now i think this

is quite a misunderstood aspect of ilps i actually like this feature because when you're relatively

young the insurance charge is very very small which means more of your money can go towards

investing and when you reach a certain age and your investment has reached a certain stage where

you feel like i don't need insurance anymore you can actually terminate as the insurance charges

are starting to get higher so it's actually a very good feature that i think is quite useful except

ilps tend to be sold as whole life plans to people and people think that they can keep this plan to a

very old age when it's not true you should not keep your ilp beyond a certain age like 60 65

because by that point the assurance charges will get higher and higher such that even you still

want to keep it the value inside your policy may not be able to sustain the high assurance charges

an increasing assurance charge model is actually a useful feature because when you're young more

goes towards investing and when you're old you can choose to stop the coverage and then you

have enjoyed the time value of money however it's pegged to an ilp with high upfront costs so the

usefulness is negated by that so long story short this feature is actually not that bad but it goes

against what a lot of people expect from their policy which is to provide whole of life coverage

of course whether or not whole of life coverage is necessary is another topic for another video

now before i move on to the last reason why you should avoid ilps i'm giving an open invitation

for people who want me to analyse policies they've bought or policies they have been recommended

just send me a benefit illustration and you can blank out all your personal details

and it will become a subject topic for my next video where i'll go through the policies

and analyse whether they are good or they are bad okay find out more in the description below so one

final reason i can think of right now why ilps are a bad idea is because you lose flexibility

in choosing where your money goes to for investing you can only choose from the insurance companies

sub funds and they tend to be all very expensive and high expense ratio funds and their performance

may not be the best with so many investment options now why limit yourself to an insurance

companies investment funds so what are some alternatives one can consider when it comes to

insurance as well as investment now disclaimer i have to put a lot of disclaimers a lot of asterisk

to say that this is not personal financial advice and you should do your own due diligence

i would say go and see a financial advisor but they tend to be the one selling you such policies

so go and read up more and research and make your own informed decision on what to do lose money

don't find me make money you want to share me sure what you can do is to buy insurance separately

from your investment because when you buy the meal together they are charging you more for the entire

meal than if you buy the separate components such a strategy is called buy term investor rest so you

take your three thousand dollars go and buy a term policy for a few hundred dollars and then use the

remaining for your investing in robo advisors use your moomoo use your tiger for buying etfs

your returns tend to be higher due to lower cost by avoiding all the upfront commissions of an ilp

you also can choose investments that are cheaper rather than high expense ratio funds that most

ilps come with now it is also more flexible let's say you're a fresh graduate or you're

tight on budget but you do need insurance coverage and you only have about thousand dollars a year

and ilp is going to give you a very pathetic amount of coverage instead you could use a few

hundred dollars a year to buy a term policy that will give you high amount of coverage and then

when your financial situation improves and you have more disposable income you can then start

your investing now a lot of people will tell you invest early invest early but if you are really

tight on budget it's perfectly fine to delay your investing journey by one two or even five years

at most you delay your retirement by one two or five years but if you do not get properly insured

the risk is that a critical illness might strike or an inability to work might happen

and you will suffer a financial impact so huge that you might never be able to recover from

so you should get your insurance in order first so buying a term policy first gives you high amount

of coverage and then when your financial situation improves you can then start your investment

now actually investment linked policies can be designed well but i have not seen an ilp that's

actually compelling enough to recommend or to buy for myself now my ideal kind of ilp will actually

retain the increasing term structure that most ilps have right now but have allocation rate

at the start close to 100 uh maybe about 80 90 percent so that the agent still can earn about

10 20 percent of the premium is that too high and allow us to select low cost funds like etfs but i

think this is a pipe dream no insurance company will be inclined to do it because agents and the

company themselves earn a lot from the ilps so you like this video and you want more people to

avoid ilps leave a comment in the comment section below so that youtube algorithm will push me up to

other people's home pages and more people can hear about this and as usual subscribe to my telegram

and remember to send me your policy illustrations so that i can analyse them in my next video until

next time stay away from ilp savings plans haley the insurance agent and i'll see you next video

right the wool comes from the sheep so if the sheep

gets some wool given back to him whose wool is it it's your wool