About this video

• Video Title: Special Guests! Chris Tan & Eddy! I Finally Understood Why ILPs are so Bad for me…
• Channel: 1M65
• Speakers: Chris Tan, Eddie, Mr. Lou (Host)
• Duration: 1:55:23

Overview

This video features Chris Tan and Eddie as special guests on the 1M65 channel, where they discuss the complexities and perceived drawbacks of Investment-Linked Policies (ILPs). The host, Mr. Lou, guides the conversation, which includes an "Ask Me Anything" segment where viewers can pose questions about ILPs and other insurance products. The discussion aims to educate viewers on the intricacies of financial planning, insurance types (ILP, endowment, universal life, whole life), and the importance of understanding product features and costs.

Key takeaways

• ILPs are complex and often lack transparency: The core argument is that ILPs are difficult for the average person to understand due to their bundled nature, with fees and bonuses being intricately mixed.
• High costs are a significant drawback of ILPs: The discussion highlights that ILPs typically have high fees, which can erode returns over time, especially in the initial years.
• ILPs often invest in actively managed funds: Provident, a wealth management company, avoids ILPs because they predominantly invest in actively managed funds, which historically underperform the market and are less cost-effective than index funds.
• Liquidity and operational inefficiency: ILPs have a locked-in period, affecting liquidity. Managing them as part of a broader portfolio is also operationally inefficient due to them being housed on insurance platforms.
• Alternatives to ILPs exist and are often preferred: Separating insurance (like term insurance) from investments (like low-cost ETFs or index funds) is presented as a more efficient and transparent approach.
• CPF Life is the best annuity in Singapore: The consensus is that CPF Life offers the best dollar payout per premium compared to private annuities.
• Prioritize needs and affordability in insurance planning: The discussion emphasizes the importance of understanding personal needs, prioritizing essential coverage (like income replacement and medical expenses) through term insurance, and then considering other products like whole life or critical illness riders based on affordability and specific needs.
• Haven offers free, client-centric insurance advice: Haven, a company associated with the speakers, provides free initial consultations focusing on clients' best interests, often recommending term insurance and avoiding ILPs.

According to the speakers, CPF Life is considered the best annuity available in Singapore. They emphasize that it offers the best dollar payout per premium and is a highly reliable source for a stable income stream throughout retirement.

Specifically, they mention that individuals who are 55 years old this year can top up their Retirement Account (RA) up to $426,000 to effectively purchase CPF Life. This would provide a monthly payout of approximately $3,300 to $3,400 for life, starting at age 65. While private annuities can be considered for supplementary income if CPF Life is insufficient, the speakers note that CPF Life's payout is significantly better and unmatched by private options.

However, they also acknowledge a downside: CPF Life lacks liquidity, meaning funds cannot be withdrawn once contributed. For those who desire flexibility, a strategy of partially topping up their RA to purchase CPF Life and using the remaining funds for other, more flexible retirement income options is mentioned, though it comes at the cost of a less optimal payout compared to maximizing CPF Life.

The speakers differentiate ILPs from endowment, universal life, and whole life policies based on their structure, investment approach, and risk.

Here's a breakdown:

• ILP (Investment-Linked Policy):

  • Structure: Combines insurance coverage with investment.
  • Investment Approach: You choose specific funds to invest in, and you bear the investment risk and return. The portion of your premium not used for insurance is invested in funds you select.
  • Maturity Date: No fixed maturity date; it's essentially an investment vehicle that lasts as long as you fund it.
  • Risk: You take the full market risk. Returns depend entirely on the chosen funds' performance.
  • Fees: Generally higher and less transparent due to bundled insurance and investment costs, including welcome/loyalty bonuses that can be offset by fees.

• Endowment Policy:

  • Structure: A savings and insurance plan with a defined maturity date.
  • Investment Approach: Premiums are invested by the insurance company into their participating life fund. You do not choose the funds; the company manages them. Returns are a mix of guaranteed and non-guaranteed (projected) portions.
  • Maturity Date: Has a specific maturity date (e.g., 15 or 20 years), at which point a lump sum is paid out.
  • Risk: The insurance company manages the investment risk, and projected returns are usually within a defined range (e.g., 3-5%), though not guaranteed.
  • Fees: Generally lower than ILPs, with a more transparent fee structure, though the non-guaranteed portion's performance can vary.

• Universal Life Policy:

  • Structure: Primarily designed for high coverage (death benefit) and legacy planning, often denominated in USD.
  • Investment Approach: Similar to ILPs in that a portion of the premium is invested, but typically in a fixed account with a crediting rate (historically around 4% in USD). It can also be used with premium financing (borrowing against the policy's value).
  • Maturity Date: Does not have a fixed maturity date.
  • Risk: Lower investment risk compared to ILPs, as it's often linked to a fixed account, but the primary risk is ensuring sufficient premiums are paid to maintain the high coverage.
  • Fees: Costs are associated with the insurance coverage and administration.

• Whole Life Policy:

  • Structure: Provides lifelong insurance coverage. Premiums are paid throughout one's life or for a limited period (limited-pay whole life).
  • Investment Approach: A portion of the premium is used for insurance coverage, and the remainder is invested in the insurance company's participating fund, similar to endowment policies. The insurance company manages the investment.
  • Maturity Date: No fixed maturity date; coverage lasts for the entire life.
  • Risk: The insurance company manages the investment risk. It offers guaranteed cash value, but early surrender might result in a loss.
  • Fees: Generally more expensive than term insurance because it covers a lifetime and includes a savings/investment component. Limited-pay versions front-load the cost.

In essence, ILPs are characterized by investor-chosen funds and market risk, endowment policies offer guaranteed savings with managed investments, universal life focuses on high death benefits and legacy, and whole life provides lifelong coverage with a savings component managed by the insurer. The speakers strongly advocate for separating insurance needs (covered best by term insurance) from investment needs (better addressed through direct investments or other vehicles).