HSBC Life Sapphire Prestige Income IIMay 1, 2023
China Life Eternal WealthMay 18, 2023
ILPs stand for Investment Linked Policies/Plans. They are usually issued by insurance companies. Premiums are generally invested into collective investment schemes/funds and mortality/morbidity insurance and other policy charges are levied on the investments.
It has been more than 2 decades since the Financial Advisers Act deemed the simple term insurance as an investment product that required a (reasonable basis) recommendation to go along when submitting a proposal to the insurance company. I will try to simplify the issues that plague the financial advisory industry till this very day and use ILPs to elaborate a few sides of the story and establish once and for all, if ILPs are good or bad.
The Birth of ILPs need to be viewed with the lens of the Traditional Whole Life Policy.
Understand that in the past, unit trust funds are not so widely available as today.
However, that did not stop people then from bemoaning the lack of investment decision making over par (participating for short) funds in cash value life policies, as a con to buying life insurance policies.
People understood they were paying over and above mortality costs (their benchmark then was yearly renewable term insurance premiums) to invest. And they want to be able to make investment decisions that might differ from the par fund.
When ILP first arrived then, it was a financial engineering structural ingenuity. It sold like hot cakes for those who understand the product.
Naturally to catch up with demand, most insurance companies will develop their own ILPs.
There was transparency over costs and fees separating mortality charges to understand how the cash value of the policy will build up over time.
This as opposed to the black box in traditional participating plans that generates illustrated future values that we see.
Forgot to pay premiums? Take a premium holiday and people understood the deduction of mortality charges. The flexibility was a breath of fresh air compared to traditional policies, which would otherwise attract premium loan and interest instead.
There were cases of abuse in projection rates in the past, and as such even the participating rates projections are controlled now. The same is true for ILP projection rates.
The benefit illustration has also undergone many changes such that many components in it are also controlled by the regulator with the “Caveat Emptor” approach. Buyer beware.
ILPs use case merits in certain scenarios.
Before universal life policies entered in a big way, there have been instances where a 60yr old person seeks whole life coverage. By default, the input parameters generating the whole life proposal will yield exorbitant yearly premiums already. Based on the conditions, the person is not accepted for term insurance but can still be accepted for whole life insurance. Funny you might think, how is that possible? It kind of depends on how much money is collected upfront. At this moment, understand that different TYPES of policies have different underwriting considerations. With accumulated life experience of 60yrs, the person also understands that mortality charges might exceed the policy value at some stage and cash top ups may be necessary. The ILP proposal will cost less than the whole life insurance option, the rest is history.
ILPs can be a part of Estate Planning.
Another use case of ILPs comes from estate planning. Background first, probate process can be lengthy. While you are alive, you can make investment decisions over your investment portfolio and react to market changes, fine and dandy. Situation is when you are gone, the value of your investments are still fluctuating with the market and with a lengthy probate, the lack of prompt reaction can lead to a decline in value of those investments. Solution that comes with a cost, ILPs. Investments are somewhat redeemed and paid out into the estate as a cash death benefit.
No financial instrument in the world generates instant estate cash liquidity the way life insurance does. ILPs provide the avenue to simply charge sum at risk mortality charges only. Hence we got 101%type ILPs.
What Happened Over Time, with respect to ILPs?
A Confluence of Factors Over a Span of Time Gives Context
Representatives from insurers dissociate themselves from being called insurance agents to becoming financial consultants and investment specialists.
ILPs were also seen to be hipper and trendier.
Its working mechanics do offer the potential (Not Guaranteed) for faster breakeven and capital appreciation.
ILP funds and unit trusts grew in popularity. When banks formed partnership distribution with insurers, packaging tactics and leveraging the banks’ brand name, it just becomes easy to forget the roots of ILPs to begin with.
Quite a number of ILPs began as feeder funds.
Which also meant another layer of fees, and over time, innovation of ILP products made them relics of the past.
Insurance companies do improve the ILP plans over the years.
There can be improved better mortality pricings in newer ILP policies than those of the past.
Competition between product manufacturers also led to one-up-manship type new launches of ILP products.
Be they front loaded, or backend loaded, just be familiar with the surrender charges, early termination charges, or allocation rates and a whole lot of terms and conditions, when taking up such plans.
My summary conclusion from all the social listening and debates, the person decided on the particular ILP because he/she can deal with the cons better. Yes you read me right, there are pros and cons to everything, the pros are not necessarily more pro than others; the decision is quite nuancedly based on the individual being able to deal with the con better niah. Aiyah, familiarity breeds discontent. More people have become familiar with the mechanics of ILPs.
In the days of old, fund switches were done in pen and paper.
If you know by now, outcomes depend heavily on the performance of the underlying funds.
Pre-signed forms were not unusual back then.
Good proper choice funds combined with good market sensing, can produce good returns to keep policyowners happy.
Some representatives then start bragging their investment judgement calls.
These attract attention from all over, including the authorities. It attracts followers who want to know how to replicate. It attracts some analysts too, who will examine the extent of bias and choice selection of accounts instead of aggregate composites. It attracts authorities who want to make sure the language and communication is not false and misleading to the public.
With technology now, pseudo fund management arrangements have also sprung up to replace pre-signed fund switch forms but authorities are insisting on certain measures and verifications to prevent them.
Long story short, understanding ILPs from the lens of a whole life policy with estate planning intents, cuts through marketing fluff and clears ambiguity.
At times you get compliance to the letter of the law but not to the spirit of the law.
Yes ethics can have different approaches. So the big elephant in the room that no one talks about all this whole time, is that there is nothing written explicitly in the contracts that the agent representative who sold the ILP is obligated to watch over the performance of the funds.
Back to the origins, the investment decision making burdens have been laid upon the policyowner for ILPs. Some representatives are very upfront about this, but majority will not because of the branding they have set upon themselves.
I will never forget Goldman putting together a product designed to fail and sold it and when grilled by congress, the stance taken is that the buyers (ok institutions fair enough) were sophisticated enough to discern for themselves. The same can be said for those deemed to have passed their CKA, deemed to have read all the terms and conditions of the product, and chose to proceed with the recommendations.
Willing buyer, willing seller. Caveat Emptor. Not every representative will take into consideration anticipated future buyer remorse in their recommendations.
Outcomes are not the fault of the product manufacturer.
Amidst all the financial scams in Singapore, I tell people that regulated investments can go awry, what more then, those that are not regulated. Whole life plans have been recommended and accepted for funding children’s tertiary education funding (Try not to be shocked but I have enough experience in the industry to have seen what reasonable basis can get you.) so understand that reasonable basis is a fair cry from diagnostic prescription level type of recommendation.
I personally do not think ILPs are for everyone and offered for acceptance on reasonable basis. Adding more layers to the onerous tedious onboarding process will only invite stones thrown at me by those in the industry.
I know there are good advisor representatives out there who watch over the underlying funds for their clients. And it is high time for people to understand the scalability issues in proposal-acceptance model and outcomes.
I have to break it down further actually, because the issue also touches on ownership of decision. Ok let’s say the market changed, fund switches called for, and the client ignores. Who is responsible for the investment performance? If the client rightfully ignores, the rep cannot claim credit. If the client wrongfully ignores, the rep will say “told ya” but causes deviation from the rep’s model portfolio. Depending on the rep’s use of technology in reaching out to all client’s in alerting fund switch changes, different response timings from the clients will lead to administrative bombs not to mention different entry/exit timings for the various accounts.
Usually, I would think the reps will email blast and the clients are to initiate the fund switches on their own with their own login. By no means should this be misconstrued as proposal-acceptance models cause poor investment outcomes. But yea, poor outcomes tend to invite fees scrutiny over time.
In the court of law, proposal acceptance stance taken ensures the client bears some responsibility for accepting the proposal.
Actuaries simply cannot bring distribution costs assumptions to ZERO.
And for as long as the distribution costs are there, the agency structure will want a stake, and each level of the structure gets a fraction of the gross distribution cost that is already factored in and permissible right from the product’s birth and onset.
The distribution costs also goes to paying salaries of the compliance department of the firm, on top of office rental and other administrative costs. Comparing across various types of wealth management products, insurance products still give the highest margins for distributing.
So actuaries of ILPs have already worked out those distribution costs, just go find one actuary to ask.
Conclusion: Are ILPs good or bad?
ILPs are like knives. Knives are tools of utility.
Knives can be used for murder or chopping vegetables for cooking. One purpose is evil while the other is good usage.
There are many different types of knives for different purposes so choose wisely for the intents and purposes, don’t use a knife meant for cheese, to slice fish for example.
The use of knives require 2 hands, yours and the rep, for optimal outcomes. One hand got to hold the item steady, right? Then again, dexterity of both hands needed too.
More importantly, do not cut yourself with knives. Use them properly – through the lens of a traditional whole life / endowment policy.
The Author (Isaac) has been in the industry since 2001. Writing style leans towards having dedicated links within the article to facilitate deeper reads into an idea. He prefers to write articles for evergreen (relevant for a good amount of time) purposes than topical (might not stand the test of time). Do continue to poke around the site if you find this article brain tickling enough. Reach out to connect over craft beer anytime.