The story of my Investment Linked Policy (ILP)

Okay, this is it.

It’s finally time for me to tell you the story of my Investment Linked Policy. After much procrastination (ever since I started this blog, in fact), I’m ready to face my mistakes and tell you guys about it.

I’ll show you the numbers, alright. I’ll tell you why it was a mistake and why I wouldn’t get one anymore.

But I’ll also tell you the benefits of having one. It’s not all 100% bad, although I’ve surpassed the stage where having an ILP benefits me. But it may benefit you, and you can decide if it’s suitable for you or not.

But nah, no more ILPs for me.

Here’s why.

I bought the policy when I was turning 18. Back then, it was 2008 where everyone around me was talking about the Great Financial Crisis and how it was a good idea to buy shares.

Well, my parents couldn’t really help me with it because they know nuts about investing. And neither did my friends. So naturally, I turned to the closest person that I can find which was a close relative of mine. Being an insurance agent and apparently financially savvy in my opinion at that time (driving a big car, living in a condominium), I looked up to my relative in awe. I was sure that he could help me with my plans to invest in the stock market.

And so he did. He introduced me to an Investment Linked Policy which was presented to me like a savings plan. Every month, I would put a sum of $125 into the company’s mutual fund. I can diversify and even split up the $125 into different mutual funds.

Next, he took out a comprehensive table which showed the rough returns of my policy for the next 60 years of my life. For an 18 year old, I didn’t know how much I really needed, but they were presented in 5 and 6 figures. Heck, they looked like a whole lot to me! And the non-guaranteed returns get higher and higher as I shifted my eyes to the outermost right column of the page.

Now, a commitment of $125 per month doesn’t sound like a big amount for a working adult but it was significant to a student who had roughly $400 of monthly allowance. That was 31.25%! But it was still possible, nonetheless, if I scrimped and saved.

I didn’t even know what I was buying. I just knew that I could make money in the long run. I could even opt for monthly withdrawals after 10 years. Also, I could do a very small top-up for some insurance coverage! Without hesitation (and with my mum’s approval, of course), I agreed to the terms and trusted my agent with full confidence.

Young and silly, that was what I was.

It has been a good 9 years and 3 months until I terminated my ILP this month. It kinda felt like a marriage between two people whom once fell in love. One of them realized that she wanted something more out of the relationship. Not wanting to let go of the many memories they had together, she hung on for another year to decide on whether to continue the marriage. Her partner could not give her what she needed eventually, and therefore, they had to part ways.

Okay I’m sorry. I’m being dramatic. And emotional about a non-living thing. :p

Back to the numbers.

Total premium: $14,411.13

Total premium invested: $13,875

Total charges: $2,500

Final surrender value: $14,487.25

The reason why the total premium is more than the total premium invested is because of the additional top up for the insurance coverage. If you look at the total charges, it came up to an amount of $2500. HECK! This was worth highlighting in red. That translates to 18% of my entire investment. How is it possible that I can even beat this by dollar cost averaging – nay, scrap that – investing in the stock market, or anything for that matter?

Now, I have no idea why the total premium is not equal to the total charges + total premium invested, but for the sake of this article, I am only going to use the total premium invested and the final surrender value to calculated my returns.

And that magical number is… Don’t be surprised now…

An annualized return of 0.92%.

????????!!!!!!!!!!……

Here’s when I have to breathe out a loud sigh. Nope, not of relief, but why I couldn’t understand the idea of Buy Term Invest the Rest. I concluded that I wasn’t too bright of a kid. And this is also what happens when people make uninformed decisions.

But anyway, let’s just continue with the numbers.

Say I wanna be optimistic and calculate the real returns for my IPL. So I will take my net premium investment of $11,375 ($13,875 – $2500) and calculate my returns once again. The number comes up to 5.12%. This should be the actual annualized return of my ILP. And if you ask me, the return is actually pretty decent for something relatively passive. This was a big proof to me that Dollar Cost Averaging for a long term approach is THE investing strategy for passive investing, and it is as sound as it gets.

This is also the perfect example of why low-cost index funds will always triumph over hedge funds with hefty compensation fees. I can’t even imagine how much the difference in returns would be right now if I had bought the STI ETF from the beginning.

Be wise – learn from my mistakes. I may not have been wise, but I stopped being stupid by cutting my losses. If you are holding on to an endowment plan or an ILP at the moment, I encourage you to request for the numbers from your agent and perform the calculations yourself. The math is as simple as it gets, and like I always say, the numbers don’t lie.

Should you need help with the calculations, let me know in the comments below and I’ll be glad to help. I would also love to hear about your experiences with investing with your financial advisers. Share them below too!

EDIT (19-Aug-17): Here’s another blogger whose GF had the same experience as me. Check out his post to see the actual returns if the money was invested into the STI ETF.

Thanks for reading!

Miss Niao xoxo

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Author: Miss Niao

Hello! I blog about financial matters and things that average people can do to have a better retirement. I want to inspire people to take control of their money and have a better understanding about it. If you are interested to know more, follow me @ missniao.wordpress.com! :)

21 thoughts on “The story of my Investment Linked Policy (ILP)”

    1. Well, I think it still serves as as a good way for people who can’t be disciplined enough to save. But to actually go beyond that and think of getting good returns? That would be wishful thinking.

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  1. I am still sitting on my ILP, decided not to cut loss but to wait for it to breakeven because it can breakeven at 10 yrs, and it’s a gamble just like my stocks too. It’s 1% of my total portfolio. I asked myself why i bought it and it was because i wanted different asset classes. On hindsight it would have been better off with ETF so i decided to also buy ETFs. The only problem is the that fees eat into returns. I really don’t know if i am making the right decision but I think i can afford the gamble.

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  2. I am still sitting on my ILP, decided not to cut loss but to wait for it to breakeven because it can breakeven at 10 yrs, and it’s a gamble just like my stocks too. It’s 1% of my total portfolio. I asked myself why i bought it and it was because i wanted different asset classes. On hindsight it would have been better off with ETF so i decided to also buy ETFs. The only problem is the that fees eat into returns. I really don’t know if i am making the right decision but I think i can afford the gamble.

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    1. Hi Littletoybrush,

      Thank you very much for your comment and sharing your experience with your ILP.

      Since you said that the ILP is only 1% of your entire portfolio, I’ll assume that you are also an investor in the stock market. I’ll also assume that the money in your ILP are all within mutual funds that are also vested in the stock market. I do not see why you have different asset classes in this situation, apart from the fact that you will directly own the shares v.s. having it in a mutual fund.

      Unless this mutual fund is outperforming the market consistently within the span of the 10 years, or at least the NET returns of the ILP are performing better than your own returns, why would you like to wait for 10 years just to break even? It makes no sense to me.

      There may be some form of insurance coverage that you might think is truly necessary, and unless it is able to maximize your protection insured needs, I do not see a reason why you would want to not cut your losses any further. But do note that I am skeptical about this, because my ILP did not serve that purpose at all.

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  3. Thanks for sharing. I like your balanced views. Each type of investments serve its own purpose. ILP provides an opportunity to do both investment and insurance though the high fees to the insurance agents and companies took out the bulk of the investment gain. It can be quite daunting for a newbie to venture into the stock market alone and we all have our own painful learning experiences. ILP is not ideal but it serves its own purpose

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    1. I’ve asked my insurance agent this question before. The answer that I’ve gotten is that not all of them do!
      However, most of them believe in whole-life insurance and endowment plans (the idea of being able to get back a sum of their premium at the end of the insured period is usually what is established in their minds).
      It is sad that sometimes the bigger picture is hard to be depicted.

      Like

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