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12 reasons why a Regular Premium Investment-Linked Policy should be the FIRST insurance policy you buy

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If you are considering buying your FIRST insurance policy (assuming you are in your twenties or early thirties), a Regular Premium Investment Linked Policy (RP ILP) would be the most suitable choice. A recent ST article quoted that 350,000 RP ILPs have been issued in Singapore. So what makes people buy RP ILPs?
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This is an original article written by Philip Loh.
12 reasons why a Regular Premium Investment-Linked
Policy should be the FIRST insurance policy you buy

If you are considering buying your FIRST insurance policy (assuming you are in your
twenties or early thirties), a Regular Premium Investment Linked Policy (RP ILP)
would be the most suitable choice. A recent ST article quoted that 350,000 RP ILPs
have been issued in Singapore. So what makes people buy RP ILPs? Read the
following to find out:
Reason 1 – Low-cost Buy Term and Invest the Difference (BTID)
whole life policy

Compare the returns a 30 year-old male non-smoker enjoys by buying a RP
ILP with a basic sum assured of $500,000 and costing $4,000/yr of premium, with the
returns he will enjoy if he buys a 30-year $500,000 term plan costing about $1,665/yr
and investing the difference in a unit trust. Using the same fund type, at the 30th year,
the RP ILP approach gives a higher return than the traditional BTID approach.

Projected
Projected
Sum
Annual
return using a return using a

Assured
Premium
gross return of gross return of
5% p.a.

9% p.a.
BTID approach
30 years Term policy $500,000
$1,665
0
0
Unit Trust
Investment
$2,335
$124,000
$258,000
Value
RP ILP approach
RP ILP
$500,000 +
Investment
$4,000
$127,000
$283,000
Value
A RP ILP ensures continuity of cover for as long as you wish. If you choose
the BTID approach, you would not be able to extend your insurance cover beyond the
30-year term WITHOUT increasing your costs.
The above analysis excludes additional financial planning fee that many “buy
term” proponents charge and the additional “asset under management” fee for
managing your investment. With additional fees factored into the analysis, the result
would be even more compelling. Furthermore, the mortality charges expensed in a RP
ILP are different from those in a term policy. In a RP ILP, because the insurance
companies are already earning a trailer fee for managing your investment, the built-in
mortality charges are kept lower. On the other hand, they charge more in term policies
to cover their overheads since they are not earning any income “investing the
difference” for you.
Many people ask why conventional BTID proponents claim that theirs is a
low-cost approach when the results do not show. As most BTID analyses are done in
the United States, it does not hold true in Singapore where there is no economy of
scale to create the low term premium environment for the traditional BTID theory to
work.

Reason 2 – Effective Forced Savings
Some financial planners suggest that separating your term cover and
investment simplifies things. After working with 500 professionals and executives,
nothing is further from the truth. The key lies in the “discipline” to invest the
difference. Most assume the front end load of most insurance policies benefit only the
financial advisors. In fact, front end loading ensures that the whole program continues
for the longest period possible during which the policyholder would enjoy the greatest
benefits.
Under a front end loading arrangement, it would usually take about 10-14
years for the policy to break even. Thus, most policyholders would discipline
themselves to contribute premium for that period of time. Under a conventional BTID
approach, the “investment component” may break even from the second year.
However, many investors are tempted to use that money for some of their immediate
cash flow needs like wedding or renovation, hence derailing them from their long-
term financial objective.
Reason 3 – Premium Holiday Feature
Policyholders can stop paying their premiums when cash flow is tight and
continue payment later WITHOUT having to pay back the outstanding premiums.
And there is NO interest charge. Many complaints against traditional whole life policy
is if you stop paying your premiums, an “automatic premium loan” kicks in to pay for
the outstanding premiums, and you are required to pay the “automatic premium loan”
back with interest. RP ILPs’ premium holiday feature helps policyholders through
tough time without creating a bigger problem for them later. Through the course of
my work, I have seen many lapsed policies because the policyholders cannot afford to
pay back their “automatic policy loan”.
Reason 4 – Flexible Withdrawal Option
RP ILPs are the most LIQUID permanent insurance policy in the market. One
concern people have when buying a traditional life insurance is that their money gets
committed for the next 20 to 30 years, and are not accessible in times of need. RP
ILPs allow policyholders to withdraw money from their accounts, without the need to
pay back. This feature is heaven-sent for many during tough times. One policyholder
who recently lost his job was glad when I told him he could withdraw up to $7,000
from his RP ILP without reducing his coverage.
Reason 5 – Adjustable Insurance Cover in accordance with your
needs at different life stages


The need for insurance changes over time. When an individual starts a family,
his need for insurance will balloon. His RP ILP will allow him to increase his
coverage without the need to pay a higher premium. The trade-off is a lower net
return as more of his premium go to the insurance charges. His need for insurance
decreases as his children grow older. He can then reduce his coverage to lower the
insurance cost and improve the rate of return.
In a traditional life or term policy, the level of cover is “cast in stone” the day
you buy it, leaving very little room for adjustment. If you want to increase your
insurance cover, your only option is to purchase another policy to supplement your
existing one. Maintaining two or more polices will result in higher policy fees. For
example the premium for an insurance policy with a sum assured of $100,000 is

cheaper than the aggregated premium for four policies of the same type with sum
assured of $25,000 each.
Instead of having one policy each to cover death, critical illnesses, disability
income, accident and hospitalization, and one investment plan, it is simpler to handle
one that consolidates all the different types of cover.
Reason 6 – High Transparency
A task force comprising MAS and LIA representatives are exploring ways to
improve the overall disclosure and transparency of insurance companies’ life funds
and how their performance correlates to the bonus payouts that policyholders receive
in their profit participating policies. Despite this commendable effort, given the nature
and complexity of “life fund”, the days of total transparency may be far away.
On the other hand, RP ILPs offer policyholders total transparency as they
are able to keep track of the performance of their funds. Ironically, many problems
highlighted in the media on RP ILP are due to their high level of transparency. For
example, the media was able to highlight the concern that insurance charges may
eventually outstrip the premium contribution because the charges are clearly disclosed
in the Product Summary of the RP ILP.
Reason 7 – Risk reduction through global diversification
One key differentiating factor between traditional life insurance and RP ILP is
that the latter allows you to invest in a diversified global portfolio of bonds and
equities. Although life funds are predominantly invested in fixed income instruments,
the exposure is largely in Singapore and only a small portion is invested overseas.
ILPs on the other hand allow you to reduce your investment risk through the timeless
theory of diversification, which is the simplest way to reduce investment risk
WITHOUT sacrificing portfolio returns. Hence, we have the paradox of higher returns
with lower risk in a RP ILP.
Reason 8 – Risk reduction through “dollar cost averaging”
Again, this is a simple yet effective method to reduce investment risk. RP ILP
reduces your risk as your investments are spread out regularly over the whole time
horizon, thereby enabling you to level out the volatility of the market and reap the
benefits of staying invested over the long term. Instead of investing all your money at
one go, you invest a small amount every month, hence averaging out your buying
price. For example, if you had invested all your money in a technology fund at the
peak of the tech bubble in early 2000, you would still be 60% down today. If
however, you had spread out your investment on a monthly basis, you would be
surprised to discover that you are in fact making a small profit now.
Reason 9 – RP ILP has an ASSURED VALUE
Many people assume that since you bear all the investment risks there is no
assurance on your policy value. To understand how the assured value is formed, we
need to examine how we derive our return in a RP ILP. Essentially, every month as
you contribute your premium, after offsetting the charges, the balance would be
applied to purchase investment units in a fund. Each policyholder would have an
account denoted by the insurance company to store the “units” he has purchased over
the years. Unlike a traditional policy where you do not own the “life fund” you are

investing in, you actually own the investment units in your RP ILP account. The
valuation of the units in your RP ILP account IS your assured value.

At the request for withdrawal, the insurance company would liquidate some of
your “units” in your RP ILP account and convert them to cash for you. In the case of a
policy loan made on your traditional life policy, since you do not own the “life fund”
which you are borrowing from, you would have to pay back the “loan” with interest.
Reason 10 – Converting your RP ILP into a retirement plan that
pays a periodic income

For a retired individual in his 60’s, the need for insurance would be low. This
is supported by the economic life value model of calculating insurance needs. The
primary concern at that time would usually be retirement financing. It would then be
an appropriate time to reduce the insurance cover, and focus the policy on generating
a good investment income to fund the retirement. The policyholder may decide to
keep some critical illnesses cover to provide for liquidity concerns in the event of a
major illness, but a large portion of the cover can be removed to enhance the overall
investment yield.
Reason 11 – Reduce your investment risk as you approach
retirement

One latest concept in fund management is “life stages fund” which reduces
your exposure to equities and increases the percentage of fixed income as you get
older. This minimizes the impact of a crash in the stock market on your retirement
fund. RP ILP allows you to place a bigger portion of your assets in equities when you
are younger and reduce it when you get older. Under a life policy which invests in a
“life fund”, the investment allocation is fixed. You would have no say on the asset
allocation.
Reason 12 – Non-accelerated Critical Illnesses Cover
Most traditional critical illnesses plans offered by insurance companies in
Singapore come with built-in death coverage. There is a significant number of single
Singaporean from well-to-do families who do not need a big amount of death
coverage. Their main concern is coverage when they are critically ill. With the built-in
critical illnesses cover in traditional CI policy, they would have to purchase the “death
coverage” that comes with it. Using a RP ILP, policyholders can reduce their death
coverage and buy a higher critical illness cover instead. Then, his cover is more in
line with his actual insurance needs.


I wish to stress that the implementation of an RP ILP is complex and appropriate
advice need to be sought from an experienced financial planner. This is because a RP
ILP is unlike a traditional life policy where you are assured of a generic result.

Just like there is no single car that can win the fancy of all drivers, there is no
financial plan that can meet ALL the needs of every consumer. It remains the job of a
professional financial planner to help you identify your unique concerns and put in
place a program to address them. A good financial advisor can connect with you on a
human level, and help you gain greater clarity and confidence of your financial future.
Only then, can the objective of financial planning be fully met.

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