Are ILPs suitable for retirement income? What to check first
Investment-linked policies are often pitched as a retirement vehicle. They can play a role, but only if you understand the charges, the rising cost of insurance and the absence of guarantees. Here is what to check first.
Investment-linked policies (ILPs) are sold as a way to grow money for retirement with some life cover attached. Whether that is a good fit depends less on the sales pitch than on four things you can check before signing: what the money is invested in, what it costs, what is guaranteed, and how the policy behaves in the years you plan to draw on it.
What an ILP actually is
MoneySense describes an ILP as a policy that combines life cover with investment. Your premiums buy units in one or more sub-funds you choose. Some of those units are then sold to pay for the insurance cover and other charges; the rest stay invested. The value of the policy is the value of the remaining units, which moves with the sub-fund's price. For that reason ILPs usually have no guaranteed cash value, and MoneySense is blunt about the downside: you can potentially lose the entire value of your investment.
There are two broad types. Single-premium ILPs take a lump sum and usually carry less insurance. Regular-premium ILPs take ongoing contributions and often let you vary the cover as needs change.
Why retirement is a demanding use case
Retirement income needs three things a pure growth product does not automatically provide: predictability, a payout mechanism, and resilience in bad years.
The cost of insurance rises as you age
MoneySense explains that the insurance charge inside an ILP typically increases every year, because the risk of death, disability and illness rises with age, even if the sum assured never changes. More units are sold each year to pay it. If you hold a high sum assured into your sixties and the sub-fund performs poorly, the units may not be enough to cover the charges and you would have to top up or reduce cover. For a retirement plan, that is the wrong direction of travel: charges climbing exactly when contributions stop.
There is no floor
A participating endowment or retirement income plan has a guaranteed component set out in the policy. An ILP does not. If markets fall in the two years before you retire, the value you draw on falls with them. MoneySense's retirement income guide suggests lowering your risk profile and avoiding products that could cost you capital as you approach retirement, and holding products that can be liquidated easily or that pay a regular income.
Early charges drag on short horizons
MoneySense notes that ILPs suit people with a longer horizon, both to ride out market swings and to defray initial costs that can significantly limit short-term returns. A 55-year-old starting an ILP to draw on at 65 has a short horizon by this standard.
Where an ILP can still fit
None of this means an ILP has no place. The Singlife blog on closing the retirement gap describes a layered approach: a base layer of predictable income from CPF LIFE and bonds for essentials, a flexible lifestyle layer, and a third layer set aside for protection premiums. It places ILPs in the growth-oriented layers, suited to younger investors with time to compound, and as a supplementary source of cash flow later in retirement rather than the foundation.
That framing is useful. CPF LIFE, which the CPF Board describes as a life annuity scheme providing lifelong monthly payouts, is the layer that cannot run out. An ILP sits above it, funding the discretionary part of retirement where a bad year is survivable.
What to check before you buy
- The sub-fund's mandate and risk class. MoneySense advises not to choose on past performance alone. Check the fund's objective, asset mix and risk rating, and whether the same fund is available as a unit trust without the insurance wrapper.
- Every charge, in dollars. Premium allocation rates, fund management fees, policy fees, mortality charges and any surrender charges. Ask for the effect on the illustrated value at year 10 and year 20.
- How much insurance you are paying for. If you mainly want investment, MoneySense suggests minimal cover or a unit trust; if you mainly want cover, term insurance is cheaper.
- The withdrawal rules. Partial withdrawals, minimum holding, and whether regular withdrawals are supported without fees.
- Fund switching terms. Most insurers offer some free switches a year, then charge.
- Whether it is a Specified Investment Product, which triggers a Customer Knowledge Assessment before you can buy without advice.
- What you would do in a bad year. If the honest answer is "sell", the product is probably in the wrong layer.
A simple test
Write down the monthly income you want at 65, then list what CPF LIFE, any annuity or retirement income plan, and rental or dividends would deliver. If the ILP is being asked to fill the gap between those and your essentials, it is being asked to do a job it is not built for. If it is funding travel, gifts or a buffer, and you have twenty years to let it compound, it may be a reasonable choice.
Talk to an advisor
An advisor can show you the ILP's illustration alongside a retirement income plan and CPF LIFE projections, so the guaranteed and non-guaranteed layers are visible side by side. Use the portal's advisor matching to find one who works on retirement planning, or ask the assistant to explain the charges in a specific product summary.
Sources
This content is educational information from a licensed advisor, not financial advice. Product details vary by insurer — verify specifics with an advisor.
