The reason why I will not buy an Investment-Linked Policy (ILP) insurance is simple.
Investment is not Insurance and Insurance is not Investment.
ILPs are too expensive, gives too little coverage, provides too little investment returns and encourages excessive risk taking.
What are ILPs?
ILPs are insurance products that provides you insurance coverage and investment opportunities at the same time. Meaning to say, part of the premiums you pay will be split among insurance coverage and investments. (eg. You pay $100, $50 goes into insurance, $50 goes into investments.)
In the perfect world, your investment is profitable and make you money, in which it can be diverted into paying for your insurance. Hence, free insurance.
Insurance can be your typical Life Insurance while investments will be made into the various unit trusts that the insurer have. Unit trust are funds handled by professionals to invest your money for you. In return, they will charge you a fee for providing you this service.
Too Expensive + Too Little Coverage
In an ILP, you got to pay for the insurance coverage, your investment portfolio, your financial consultant and investment manager for providing you a service.
Thus making an ILP very expensive, usually too expensive.
When purchasing an ILP, the topic of Insurance vs Investment will inevitably pop up. In what sense?
How much to channel into insurance? And how much to channel into investment?
Channel too much into insurance and your investment becomes too small. Channel too much into investment and your coverage becomes very little. Might as well treat them as separate instead of bundling them together.
Too Little Investment Returns
It is a well-known fact that most professionally-managed funds cannot beat the indexes. Legends like Peter Lynch (average annual returns – 29.2%) are legends because successful fund managers that actually beat the indexes are hard to find. The skillset required to beat the indexes on a consistent basis are immensely rare.
As a consumer, of course you would like to invest your money in funds managed by the next Peter Lynch.
The question is, while you look at the list of unit trust made available to you, how would you know which fund has a manager with the skillset of Peter Lynch?
The answer is, you don’t know. Your best bet is to guess.
At this moment of time, you would think, well, the Financial Consultant (FC) is the one in the business, the recommendation would be fine. Just think Hyflux. Most of the investors bought under the recommendation of professional consultants. What if the FC is wrong? What if the manager is him or him?
Their recommendation, your money. This is excessive risk taking, which bring us onto the next point.
Too Much Risk-Taking
At this moment, I would like to quote Charlie Munger;
In an ILP, usually, you will usually be provided with a list of recommended unit trust, and then you simply dump your money in.
Dump your money in and let the professional do the work.
Capital allocation, a VERY IMPORTANT part of investment, is not a big concern.
Having an entry strategy and exit strategy is not a priority. It’s either all in or not.
These are extremely risky and a recipe for disaster.
One last reason why I will not buy ILPs are, ILPs are consumption items. They are not investments, in good times and bad times, you will have to pay premiums to upkeep the policy. You are tied to a contract.
How can that be an investment? It is a liability.
Hence, the reason why I would prefer to keep my insurance and investments separate. Learning how to invest myself provides me with the ability to make a lot more money than an ILP can ever make me.