Investment-linked policies (ILPs) combine life insurance with investing. Your premiums buy units in investment sub-funds, and the insurer sells some of those units to pay for your life cover and its charges. The value is not guaranteed and can fall to nothing. ILPs are among the most complex products sold to retail customers in Singapore.
This explainer starts with the risks, then shows how the charges work and what MAS requires insurers to tell you. It is general education. We do not review or recommend any ILP or sub-fund.
The Risks of Investment-Linked Policies, First
MoneySense sets out the main risks plainly:
- No guaranteed returns. The policy’s value depends on how the chosen sub-funds perform, and can go down as well as up.
- You can lose everything you put in. ILPs usually have no guaranteed cash value, so you can potentially lose the entire value of your investment.
- Rising insurance charges. The cost of your life cover is taken from your units and rises with age. If the units are not enough, you may need to pay more or reduce your cover.
- Charges can change. For a class of regular-premium ILPs, an insurer may raise the cost of cover if claims rise in a sustained way.
- Long commitment. MoneySense notes it may be costly to end a product in its early years, and asks whether you can keep up the premiums.
The short version: An ILP is an investment with insurance charges taken out of it. If markets fall while the cost of cover rises with age, the policy can run short of units, and the cover can lapse unless you pay more.
How the Charges Work
MAS Notice 307 lists the fees an insurer must set out for an ILP and its sub-funds. They come out in two places.
Taken from your premiums or by cancelling units:
| Charge | What it pays for |
|---|---|
| Premium charge | Upfront deductions when you pay a premium or top up |
| Charges for insurance coverage | The cost of your life cover, usually rising with age |
| Switching fee | Moving money between sub-funds |
| Redemption fee | Selling units |
| Other recurring fees | Any policy fee the contract allows |
Taken from the sub-fund’s assets, so reflected in the unit price:
- Management fee.
- Fees of any underlying funds the sub-fund invests in.
- Performance fee, if any.
Where the contract allows a maximum fee, MAS requires the insurer to say so and state the maximum.
What happened to “premium allocation”. Older ILPs often showed a premium allocation rate, such as a share of each premium that bought units in the first years. For ILPs issued on or after 8 October 2021, Notice 307 requires insurers to combine all upfront deductions into one figure called the “premium charge”, and not to use the term “premium allocation rate”.
A Simple Illustration of Rising Insurance Charges
Hypothetical figures, chosen only to show the mechanics. They are not from any policy.
An illustrative policyholder has units worth $60,000 at 55 and pays no further premiums. The yearly charge for the same life cover is $800 at 55, $2,000 at 65 and $5,000 at 75.
- If the sub-funds rise steadily, growth may cover the charges for some years.
- If the fund stands at $50,000 at 72 and the sub-funds fall 20% that year, it drops to $40,000, while the charge keeps climbing.
- By the late 70s, a $5,000 yearly charge can empty a shrinking fund within a few years. The policy then needs top-ups or lower cover, or it lapses.
The point is the direction of travel, not the numbers: a rising cost meets an uncertain fund value. Your policy illustration shows this for your actual charges.
What MAS Requires Insurers to Give You
Under Notice 307, an insurer must prepare for each ILP:
- A product summary, with the fees and charges, investment approach and risks of each sub-fund.
- A policy illustration, showing how the policy may perform. Values in an ILP illustration are not guaranteed.
- A Product Highlights Sheet for each sub-fund, a short summary in a set format. MoneySense lists it among the documents you receive.
- Regular statements, showing units bought and sold, each fee or charge by purpose (such as the premium charge or the charge for insurance coverage), the death benefit and the net cash surrender value.
Insurers must tell existing policyholders about any significant change to the ILP or a sub-fund at least one month before it takes effect. MoneySense adds that life insurers give a 14-day free-look period from the day you receive the policy documents.
Why ILPs Are Hard to Compare
- Two layers of cost: insurance charges plus fund fees.
- Charges that change with age, and sometimes with claims experience.
- Many sub-funds, each with its own risk level and fees.
- Illustrations that depend on assumed returns.
MoneySense groups ILPs with whole life and endowment policies as “bundled” products, which generally cost more than term cover, and its ILP page notes that upfront costs can significantly limit short-term potential returns. Its ILP page suggests comparing investing through an ILP with investing in other products. Our guides to whole life vs term insurance and the life insurance basics set out that choice.
What To Do Next
- If you already hold an ILP, find your latest statement and note the charge for insurance coverage, the fund value and the net cash surrender value.
- Ask your insurer for a fresh policy illustration at today’s age, showing when the fund could run out under lower returns.
- Check your protection needs separately with the protection gap calculator.
- Before changing or surrendering a policy, ask what you would lose: surrender charges, cover, and the cost of new cover at your age.
