What is an Investment-linked Insurance Policy (ILP)?

Investment-linked insurance policies (ILPs) have both life

insurance and investment components. Your premiums are
used to pay for units in investmentlinked sub-fund(s) of
your choice. Some of the units you buy are then sold to pay
for insurance and other charges, while the rest remain
invested.

ILPs provide insurance protection in the event of death or
total and permanent disability (TPD), if included. Depending
on the policy, the death or TPD benefit may comprise the
higher of the sum assured or value of ILP units or some
combination of the sum assured and the value of ILP units.
How much is paid depends on the value of the units of the
sub-fund at the time.

Some consumers prefer ILPs because they want more
exposure to investments than other life insurance products
may provide. But if you are more concerned about getting
insurance coverage, make sure the product you buy meets
this need. You may need to consider other life insurance
products.

ILPs can be classified into two categories:
Single
premium
ILPs
You pay a lump sum premium to buy units in
a sub-fund. Most single premium ILPs provide
lower insurance protection than regular
premiums ILPs.
Regular
premium
ILPs
You pay premiums on an on-going basis.
Regular premium ILPs may allow you to vary
the level of insurance coverage you need.
Unlike whole life or endowment participating policies, ILPs
usually do not have guaranteed cash values. The value of
the ILP depends on the price of the units in the sub-fund
which in turn depends on the sub-funds performance.
Some investment products have been categorised as
Specified Investment Products (SIPs). Do check with your
financial institution whether the product you are considering
is an SIP. For information on the requirements in place
when transacting SIPs, please refer to the Consumer
Guide on SIPs requirements.
While the premiums of an ILP remain constant throughout
the life of the policy, the cost of insurance coverage
increases year by year as you get older. This means more
units may be sold to pay for the insurance charges, leaving
fewer units invested to accumulate cash values under your
policy.
Investment-linked sub-funds

ILP sub-funds have different features and risks, catering to
different consumer preferences. The sub-funds invest in
portfolios of assets according to the stated investment
objective for the fund. The sub-fund may be managed by
the insurer or the insurers appointed third party fund
manager(s).

What are the benefits?

Some consumers prefer ILPs because they want more
exposure to investments than other life insurance products
may provide. There is a range of sub-funds to choose from
and most regular premium ILPs give you the flexibility to
vary the insurance coverage and investment mix according
to your changing financial needs.

Choice of sub-funds

ILPs offer a range of sub-funds that you can choose from. It
is important to understand the sub-funds investment
strategy and approach, as well as the potential risks.

Choose a sub-fund(s) that suits your investment objectives,
risk profile and time horizon. Do not assess the sub-funds
return only. Make sure you are comfortable with the sub-
funds risks and that these are consistent with your risk
profile. Some investments offer greater potential for higher
returns but come with an increased likelihood of losing
money or not performing as expected by the end of your
investment horizon. On the other hand, cash sub-funds may
be expected to yield more modest returns in exchange for
relative safety.

Do not be tempted to take on more risk in exchange for
potentially higher returns. Do compare the suitability of the
ILP with other investment products.

Please be aware that if you have a combination of high
insurance coverage and a poorly performing investment-
linked sub-fund, the value of the units in your policy may not
be adequate to pay the insurance coverage charges. If so,
you will have to increase your premium payment to pay for
insurance coverage.
For investments under the CPF Investment Scheme, the
CPF assigns a risk classification to all participating ILP sub-
funds. For more information, please refer to the CPF Board
website. Risk classifications can only be a very broad
guide.
What if you want to switch sub-funds?

ILPs allow you to move your money from one sub-fund to
another. This is known as fund switching and may be
helpful if your financial circumstances and risk appetite
have changed and you no longer find your current sub-fund
suitable. When selecting or switching sub-fund(s), do take
your ability and willingness to take risk, investment
objectives, time horizon and other personal circumstances
into consideration.

Most insurers offer a limited number of free switches and
charge a nominal fee per switch thereafter. Before
switching from one sub-fund to another, check whether you
are entitled to free switches and if not, how much you would
need to pay for the switch.

How can you monitor your sub-funds performance?

You can monitor your investment-linked sub-funds by
checking the unit prices published daily in newspapers
including The Straits Times, The Business Times and
Lianhe Zaobao. Some insurers also publish unit prices on
their website.

Flexibility

Most regular premium ILPs give you the flexibility to vary
the insurance coverage and investment mix if your financial
needs change. You may top up your investments, make
withdrawals and switch sub-funds. But any increase in
coverage will be subject to underwriting.

You may also request premium holidays, during which you
can stop paying premiums temporarily without having to
terminate your policy. Do check the Policy Contract and
Product Summary for the various charges which apply
when you make these changes.
What is the difference between an ILP and other life insurance
policies?
The key differences between ILPs and other life insurance
policies, such as participating whole life and endowment
policies and term insurance policies, are summarised in the
following table:
ILPs Whole Life,
Endowment &
Term Plans
Investment
Mandate
Part of your premiums
is invested in units in
your chosen sub-fund.
Returns are directly
linked to the value of
the underlying
assets.

You can track the
sub-funds
performance via the
daily publication of
unit prices.
For participating
policies, all of
your premiums
go into the
insurers
participating fund.
The insurer
decides the
investment
objective and
approach for the
fund taking into
account the
insurers overall
liabilities.

The funds
performance
depends on its
investment
performance,
claims
experience and
expense levels of
the fund.

Term insurance
policies do not
provide
investment
returns.
Bonuses There are no
bonuses. The ILPs
value depends on the
performance of your
chosen sub-funds.
For participating
whole life and
endowment
policies, bonuses
depend on the
performance of
the fund. They
are not
guaranteed, but
once declared by
the insurer,
they become
vested and are
guaranteed.

Non-par and term
policies do not
pay bonuses.
Returns from
policy track
the ups and
Yes, the returns are
directly linked to the
value of the assets in
For participating
whole life and
endowment
downs of
investment
markets?
the sub-funds. policies, the
smoothening of
bonuses means
that the returns
from your policy
will not
necessarily track
the ups and
downs of
investment
markets
Assets of
policyholders
identifiable?
Assets for each ILP
policyholder are
identifiable in the form
of units held.
Assets of
participating
policyholders are
maintained at the
fund level.
Cash Value You may withdraw the
cash value of the units
allocated to you,
subject to possible
surrender charges.
Early termination of
the policy may be
costly and the cash
value payable may be
less than the total
premiums paid.
Whole life and
endowment
policies build up
cash value after a
few years. Early
termination of the
policy may be
costly and the
cash value
payable may be
less than the total
premiums paid.

Term insurance
policies do not
have any cash
value.
Are
cash values
guaranteed?
No, cash values
depend upon the
value of the sub-
funds units and are
usually not
guaranteed.
A part of the
cash values
under a
participating
policy will be
guaranteed.
Investment
Risk
The investment risk is
borne entirely by you.
There are two
categories of
benefits those
which have been
declared and are
guaranteed and
non-guaranteed
benefits. For
guaranteed
benefits, the
insurer bears the
investment risk.
But non-
guaranteed
benefits (i.e.
potential benefits
arising in the
future) depend on
how the insurers
participating fund
performs.
Premium
Breakdown
The amount of the
premium used for
insurance coverage,
charges and buying
units are unbundled
and transparent. They
are disclosed in the
Product
Summary, Benefit
Illustration and Policy
Contract.
The amount of
premium used for
insurance
coverage,
charges and
investment are
bundled. They
are not
separately
identified in the
Product
Summary and
Policy
Contract.
What risks do ILPs have?
Returns are not guaranteed

ILPs carry investment risks. The value of an ILP varies,
depending on how the sub-fund you have chosen performs.
The returns are not guaranteed. Do note that the past
returns of a sub-fund are not necessarily indicative of the
future performance of the sub-fund.

Units may be insufficient to pay the insurance coverage
charges

Insurance coverage charges usually increase as you grow
older, as the risk of death, disability and illness increases
with age. This is even if you maintain the same coverage
(sum assured). The increasing cost is factored into the
amount of premiums we pay. Even if you are paying the
same monthly premium, more units may be deducted to
pay the higher insurance coverage charges, thus leaving
fewer units for investment. If you have a combination of
high insurance coverage and a poorly performing
investment-linked sub-fund, the value of the units in your
policy may not be adequate to pay the insurance coverage
charges. In such a scenario, you will have to increase your
premium payment or reduce the insurance coverage.

Apart from increasing charges due to age, in the case of
regular premium ILPs, insurers may also increase the cost
of insurance coverage, subject to limits stated in the Policy
Contract, if there has been a general and sustained
worsening of claim experience. Generally, any increase
would be applied to an entire class of policy and not just to
an individual policy.
How much would an ILP cost?
Fees and Charges

You can find the details of all the charges of an ILP in its
Product Highlight Sheet (PHS), Product (Fund) Summary
and Policy Contract. The different types of fees and
charges are as follows:
Fees and charges What it is
Insurance coverage
charges
Pays for death and other coverage
provided for.
Charges depend on factors, such
as amount of coverage you want,
age, gender and whether you
smoke.
Charges increase with age and are
usually funded by the sale of units
purchased with your premium.
Fund management
fees
Payable to the fund manager for
managing the sub-fund.
Policy/administration
charges
Fees for administration of the
policy.
Surrender charges Payable for partial or full sale of
units before a certain time period.
Before selling your units, make
sure there are enough units left to
sustain the insurance cover you
want.
Bid-Offer Spread Units are bought at offer price, and
sold at bid price.
The difference between offer and
bid prices is called the spread and
is usually 5%.
The spread pays for distribution
costs, marketing and other general
administration expenses.
Fund Switching
Charge
A limited number of fund switches
are allowed each year without
charge.
Subsequent switches will be
subject to a charge.
Note that fees and charges may not be guaranteed and are
subject to change. These fees and charges (including
distribution costs such as commissions) are typically
deducted from the (monthly) sale of units.
How much of the premium is used to purchase units?
Purchase of units

The full amount of premium paid may not be used to buy
units. The proportion used is commonly known as allocation
rate and is stated in the Product Summary and / or Policy
Contract. For most single premium policies and top-ups,
100% of your premium is used to purchase units. For
regular premium policies, the amount of premium used will
depend on whether it has a "front-end" or "back-end"
loading.
Front-end loading
In a front-end loaded policy, most of the premiums will pay for the insurers expenses including
distribution and administration costs in the early years. The remainder pays for units. Over time,
the amount of premium used to buy units increases until it reaches 100%.

For example, the allocation rates for a regular premium plan may be:
Policy year 1 15% 15% of the first years premium will
be used to purchase units.
Policy year 2 30% In the second year, 30% will be
allocated to purchase units
Policy year 3 50% In the third year, 50% will be
allocated to purchase units.
Policy years
4 - 9
100% From the fourth to ninth year, the full
premium will be used to buy units.
Thereafter 102% From the tenth year onwards, 102%
of the premium will buy units.
The diagram below illustrates how the allocation rate is applied to the first year premium for a
regular premium ILP with front-end loading:
Payment of Premium
Policyholder pays premium.
Annual premium of $1,200
is paid.

Allocation of Premium
Insurer allocates a portion of
the premium to purchase
units in investment-linked
sub-fund(s) that the
policyholder selects.
Year 1 Allocation Rate: 15%.
This means that $180 (15%
of $1,200) is allocated to
purchase units. $1,020 (85%
of $1,200)
goes to pay for initial
expenses, which includes
distribution and
administration costs.

Purchasing Units
Units are purchased at the
Offer Price.
Offer Price: $1
Premium Allocated: $180
Number of Units Purchased:
180

Selling Units To Cover Bid Price: $0.95
Charges
Units are sold at the Bid
Price to pay charges in the
ILP. The Bid Price is usually
lower than the Offer Price.

Charges include charges for
insurance protection. This
depends on the amount of
coverage and type of
insurance protection
selected.
Insurance Charge: $50

Number of Units Sold to Pay
Insurance Charge: 53 ($50 /
$0.95)

Remaining Number of Units
in the ILP: 127 (180 53)

Cash value of the ILP: $121
(127 units x bid price of
$0.95)
Note: In the above example, the number of units is
rounded to nearest whole number.
Back-End Loading
Under a back-end loaded policy, 100% of premiums are used to buy units from the start.
Distribution and administration costs are covered by back-end charges imposed when you
surrender your policy, partially or fully, within a certain period of time. Although the premium
allocation structure differs for front-end and back-end loaded ILPs, the overall effect of the
charges will be similar.
Offer Price
The offer price is the price paid to buy units. For example, if the offer price is $1 and the whole of
a $1,000 premium is used to buy units, it will buy 1,000 units.
Bid Price
Units are then sold at the bid price to pay for the various charges. There is typically a 5%
difference between bid and offer prices. For example, if the bid price is $0.95, 1,000 units can be
cashed in for $950. The cash value of the ILP depends on the number of units you have and the
bid price of those units.

Bid and offer prices depend on the performance of the sub-fund(s) and change on a daily basis.
How are unit prices computed?
Net asset value
The methodology and how often unit prices are computed vary from sub-fund to sub-fund and is
explained in the Product Summary and Policy Contract.

Generally, the fund manager calculates the sub-funds net asset value based on a valuation of its
underlying assets, after the market closes. After deducting fund management charges from the
net asset value, the balance is then divided by the total number of units to derive the unit price.
All ILP orders to purchase or sell units are settled based on the next computed unit price (next
business days price), sometimes referred to as forward price.
Can you invest with your CPF savings?
You can use your CPF savings if the ILP is included under
the CPF Investment Scheme. Since January 2001, only
single premium policies have been allowed under the CPF
Investment Scheme. However, CPF members who have
purchased regular premium policies prior to 2001 can
continue to have the regular premiums paid from their CPF
savings. For more information, please refer to the CPF
Board website.
Are ILPs suitable for older people?
You may not need life insurance if you do not have any
dependants, e.g. your children have grown up and you and
your spouse have adequate savings.

If you are considering an ILP, do think about whether you
can keep up with the premiums if you no longer earn an
income. Also, ILPs are better suited for consumers with a
longer investment horizon to ride out market fluctuations
and defray initial costs which can seriously limit short term
potential returns. There may be other investment options
that could better suit your needs.

Similarly, if insurance protection is a significant objective,
but coverage is required only for a limited period, there
could be other insurance options you should consider.
Keeping track of your ILP
Your insurer will send you a statement, at least once a year.
This statement shows the value of units in the policy,
transactions for the period and charges paid through the
sale of units. Make sure you review this statement to check
if the ILP and sub-fund(s) selected continue to suit your
needs. Seek advice if your circumstances and what you
need have changed.

The above information is prepared in collaboration with
the Central Provident Fund Board and Life Insurance
Association of Singapore.


Life Insurance & Investment Linked Products
(ILPs)

Comparing Unit Trusts, Investment-Linked Policies (ILPs) and Endowment Policies
Questions You Should Ask Before Taking Up an Insurance Product
Role of Insurance Planning in Portfolio Management
Planning Your Life Insurance Needs at Different Life Stages
Understanding Life Insurance and Investment-Linked Products (ILPs)
Video - Life Policies Including Investment - Linked Policies (ILPs)

Basic Types of Life Insurance

Whole Life
- A form of permanent insurance policy
- Provide coverage for the entire life of the insured
- Premiums can be paid:
--Throughout insureds life;
--or For a limited period

Term
A form of temporary insurance
Provide coverage for a specified time period only (known as policy term)
Death benefit is payable when death occurs during policy term
If insured survives the policy term, nothing is paid

Endowment
A form of permanent insurance
Provide coverage for a specified time period only (known as policy term)
If insured dies during policy term, death benefit will be paid
If insured survives the policy term, maturity benefit will be paid upon maturity of the
policy

Classification of Traditional
Life Insurance


Quick Review


Investment-linked Insurance Policy (ILP)
An life insurance policy which provides a combination of protection and investment.
Premiums are used to purchase life insurance protection and investment units in
investment-linked fund(s). Policyholders can choose from the list of investment-linked
funds offered by insurer.
The value of the ILP at any time varies according to the price of the underlying units,
which in turn depends on how the underlying fund performs.

How does one take-up an ILP?


Types of ILP


Potential Benefits of investing in ILPs
Diversification
Flexibility
Professional management of investment-linked funds
Dollar Cost Averaging (applicable to Regular Premium ILP)

Risks of investing in ILPs
Policy value fluctuates according to the performance of the underlying funds
To achieve higher potential yield, policy owner may also be exposed to higher
investment risks
Investment returns are not guaranteed
Potential risk of losing capital invested
Insurance coverage charges are not guaranteed
Units may be insufficient to pay the insurance coverage charges if performance of
underlying funds is very poor