ILP surrender charges: the schedule that catches early leavers
Investment-linked policies recover their upfront costs from anyone who leaves early. This guide explains where the charges sit, how the schedule typically tapers, and how to read the product summary before you commit.
An investment-linked policy (ILP) is sold as flexible: switch funds, top up, withdraw, adjust cover. The flexibility is real, but it sits inside a charging structure that makes the first years of the contract expensive to leave. Understanding that structure before you buy is the difference between a product that works as designed and one that leaves you with less than you paid in.
Where the money goes
MoneySense describes the mechanics plainly. Your premium buys units in one or more sub-funds. Some of those units are then sold to pay for insurance charges and other fees, and the rest stay invested. The value of the policy at any time is the value of the remaining units. There is usually no guaranteed cash value, which is why the LIA glossary notes that an ILP's surrender value depends entirely on the current price of the units in the funds.
That creates two separate ways to lose money on exit. The first is market movement: if the sub-fund has fallen, your units are worth less. The second is the charge structure, which is the subject of this guide.
The charges that bite early
ILPs carry several layers of cost. Not every product has all of them, and the names vary, but the categories are consistent:
- Insurance charges, deducted monthly by selling units, which rise with age and are proportional to the sum assured.
- Policy or administration fees, a flat amount or a percentage of the account value.
- Fund management fees, built into the unit price of each sub-fund.
- Fund switching fees, after a set number of free switches each year.
- Surrender or partial withdrawal charges, applied when you take money out before a stated period has passed.
The last category is the one that catches early leavers. Regular-premium ILPs commonly define a minimum investment period during which the insurer is recovering the costs of setting up the policy, including distribution costs. If you surrender in that window, a percentage of the account value, or of the premiums paid, is deducted before you receive anything.
How a schedule is typically shaped
The schedule is set out in the product summary, and it is worth reading that table rather than relying on a verbal description. The usual pattern is a charge that is highest in the first policy year and steps down each year until it reaches zero at the end of the minimum investment period. A charge expressed as a percentage of account value falls with time; a charge expressed as the loss of a proportion of early premiums can mean that surrendering in the first year or two returns very little.
Some products present the same economics in reverse, as a reward for staying rather than a penalty for leaving. Etiqa's Invest Starter, for example, describes a policy charge refund of 0.8 per cent of average account value from the start of the fourth policy year, for each completed three-year block with no partial withdrawal. The label is different; the incentive to stay put is the same. Figures like these come from the insurer's published material and can change; the product summary and policy contract govern.
Because schedules differ so much, we do not quote a typical percentage here. Ask for the surrender value table in the policy illustration at years one, three, five and ten, and compare it with total premiums paid at each point.
Partial withdrawals and premium holidays
Two features are often presented as escape valves. Partial withdrawals let you take some money out while the policy continues, but they can trigger a charge during the minimum investment period and may forfeit loyalty bonuses. Premium holidays let you stop paying for a while, but the insurance and policy charges continue to be deducted by selling units. MoneySense warns that a combination of high cover and a poorly performing fund can leave too few units to pay the charges, forcing you to top up or reduce cover. A premium holiday accelerates that risk.
Questions to ask before buying
- How long is the minimum investment period, and what is the surrender charge in each year of it?
- What proportion of my first-year and second-year premiums is actually invested in units?
- Are there loyalty or refund bonuses, and what conditions cancel them?
- What are the insurance charges now and at ages 50, 60 and 65 for the sum assured proposed?
- If I want protection only, what would a term policy for the same sum assured cost? MoneySense notes that term cover typically gives more protection per dollar.
- Is the sub-fund available as a unit trust outside the policy, and at what cost?
Reading your annual statement
MoneySense recommends reviewing the statement your insurer sends at least once a year. It shows the units held, transactions, and the charges paid by selling units. Compare the account value with cumulative premiums, and note where you are in the surrender charge schedule. That single check tells you what leaving would cost today and whether the product is doing what you bought it for.
Our plan comparison lists the published ILP designs side by side, though the charge schedules themselves live in each product summary.
Talk to an advisor
If you already hold an ILP and are weighing whether to keep it, surrender it or stop premiums, the answer depends on where you are in the charge schedule, the fund's performance and what the cover is worth to you. A licensed advisor can read the product summary with you and model the alternatives. Use the portal's matching to find one, or ask our assistant to explain any charge you see on a statement.
Sources
This content is educational information from a licensed advisor, not financial advice. Product details vary by insurer — verify specifics with an advisor.
