Last Updated on June 16, 2023 by Tree of Wealth

Investment-Linked Policies (ILPs) have become more popular recently due to their ability to utilise insurance products for investment purposes as well. This begs the following question: how do ILPs work, and how is the investment portion different from a normal fund (unit trust, retail fund)?

Additionally, what are all of the different sub-funds available, and what can they provide? In this post, we will talk about the difference between unit trust and ILP sub-funds, and also provide a comparison on whether you should invest in them.

What is a Retail Fund (Unit Trust)?

Unit trusts (also known as a retail fund) are funds where multiple investors come together to pool money, which is then handed over to a fund manager who in turn invests this pooled money into an investment portfolio. They are often managed by finance professionals (fund managers), and frequently include a range of assets and instruments including stocks and bonds. Fund managers will make decisions on what to purchase in the portfolio depending on their objectives.

Examples:

• Fundsmith Fund
• Allianz Income and Growth Fund
• Nikko AM ARK Disruptive Innovation Fund

In unit trusts, any returns you see go straight to you as the investor. Any dividends can also be withdrawn or reinvested back into the fund to compound for more returns. While an individual investor holds no decision-making ability on what instruments are invested in within the unit trust (this decision is made by the fund manager; the only decision the investor makes is whether to invest in this unit trust or not), it is considered a safer tool for investment due to the inherent diversification of investing in more than one instrument (i.e. 10K in unit trust with Google, Apple, and Facebook as opposed to investing 10K all into Google).

There is also no lock in periods and you can literally withdraw anytime you want. This can be detrimental because in investment, you want something that is invested on a certain time horizon to see growth.

You can also invest in retail funds like this through an ILP (Investment Linked Policy), though not all ILPs carry retail funds.

What is an ILP sub-fund?

As mentioned, traditional investment linked policies or ILPs are a type of coverage that has insurance elements and investment components into a single package. Premiums that are paid are used to first purchase units in a sub-fund, and a portion of those units are then resold to pay for the insurance coverage. Clients have the ability to choose which sub-funds they want to invest in as part of their product package, and this investment instrument allows clients to use the premiums they would already be paying for insurance coverage to invest instead.

Examples:

• GreatLink ASEAN Growth Fund
• PruLink Global Equity Fund
• AIA Greater China Equity Fund

ILP funds allow its investors to grow their wealth through active investments instead of just purchasing insurance. The ILP sub-fund, therefore, is the fund that you would be investing in. Most companies that offer ILP funds will have a variety of sub-funds that you can choose to invest in based on your personal opinions and needs as well.

Comparison of Unit Trust Retail Funds vs ILP Sub-Funds

To clarify the difference between funds and sub-funds: funds are often managed directly where the assets are held. On the other hand, sub-funds are managed by a team external to where the assets are held.

In the case of ILP sub-funds, they are managed by the insurance company or an external (non-main) holding company that is engaged to do so, and are also linked to insurance components.

When considering an ILP, it is still important to ask if the investment linked plan in Singapore is an investment directly into a unit trust (held by asset holder) or if the company only offers their own sub-funds. There may be a difference in management styles for one or the other.

Typically, a sub-fund has the insurance company’s name on it (e.g. AIA Greater China Equity Fund). On the other hand, if you don’t see the insurance company’s name (e.g. Fundsmith Fund), then this indicates that it is a unit trust held outside of the insurance company, managed by the fund company.

The biggest distinction between either one is mainly when it comes to the fees involved.

Fees Involved

Do note that these fees vary from fund to sub-fund to ILP.

Investing directly in a unit trust generally means that whatever returns your investment receives are entirely yours. Management fees are built into the model of direct investment.

However, when investing in a general sub-fund (via traditional ILP), you often have to pay an additional fund management fee – for instance, 1.5%. As such, even if the investment originally netted you an 8% return, 1.5% would need to be subtracted, leaving you with only 6.5% returns.

Furthermore, for ILP sub-funds, there are additional fees – the insurance premium, the ILP management fee, etc., and thus the returns are generally even lower than even a general sub-fund. In the example above, you might only receive around 4% of the 8% return.

The returns do not seem competitive compared to a unit trust at all.

New 101% ILPs & Why You Should Consider

Investment focused ILPs are usually categorised with 101% of protection (as they are more investment focused). They have more weightage into investment, yet providing assurance to policy holders that in the event of death, their investments are being protected for.

101% ILPs set out to minimise that risk by investing in longer time horizon to average the risk and steady the returns, as opposed to traditional 105% ILPs that takes into higher cost of insurances (as well as investing into sub-funds managed by insurers).

That being said, they invest in retail funds/ Unit trusts, and even Accredited Investor Funds.

Time Horizon

Generally, the approach to ILPs is on a consistent basis and it takes the emotions out of the investment process and focusing on the overall time horizon. This means not to be affected by the market and continue to invest consistently, hence the term “dollar cost average”.

The ILP will then grow over the time horizon (minimum premium investment period). You also have the choice of continuing investing after the premium term/ minimum investment period should you find that the returns are good, as it would be higher than if you invest in a fund itself, which brings us to the next point:

Start-Up & Loyalty Bonuses

The Initial Bonus further adds value to the investment that you are taking up. With start-up bonuses ranging from 19.5% to 35% right from the first year of investment, this helps to cushion the charges as well as amplifying your investments with the funds you choose.

Also, loyalty bonuses of 0.15% to 1.8% help in reducing the charges.

Direct investment into unit trusts are frequently something you must handle by yourself – that is, the decision on where to invest, how to invest, and whether or not you should invest in that instrument in the first place is ultimately up to you.

As such, the fund management fees paid to sub-funds and ILPs take care of that for you, which can be a relief to those who want to invest but who are not familiar enough or do not have the time or capacity to do sufficient research.

In summary

ILPs are a combined investment and insurance product that allows both insurance coverage as well as investment opportunities that are handled by financial experts. While the returns may not be as high as that of a pure investment instrument in unit trusts, the expertise that goes into handling the sub-funds, as well as the additional insurance coverage, may provide a safety net that is able to ease you into investments.

Consider the pros and cons of each method; there are no one-off methods that are successful for everyone. You will pick different instruments based on your individual needs and strategies, and this article has hopefully provided education and information on ILPs that can inform your decisions.