ILP vs term plus index fund: running the numbers honestly
An investment-linked policy bundles cover and investing into one premium. Separating them into term insurance and a low-cost fund is the usual alternative. Here is how to compare the two without fooling yourself.
Few purchases generate as much heated advice as the investment-linked policy. Supporters point to flexibility and discipline; critics point to charges. Both are partly right, which is why the useful thing to do is not to pick a side but to compare the two routes on the same terms. This guide sets out how to do that for a Singapore buyer, and where the comparison usually turns.
What an ILP actually is
MoneySense describes an investment-linked policy as a contract where your premiums buy units in one or more sub-funds, and some of those units are then sold to pay for insurance and other charges while the rest stay invested. The death or disability benefit is typically the higher of the sum assured and the unit value, or a combination. There is usually no guaranteed cash value, and you bear the full investment risk.
The insurance charge is the piece most buyers underestimate. It rises every year with age even if the sum assured stays the same, so more units are sold each year to pay it. MoneySense warns that a high sum assured combined with a poorly performing sub-fund can leave too few units to meet the charges, forcing you to top up or cut cover. Insurers can also raise the cost of insurance for a whole class of policies if claims experience deteriorates.
What the alternative looks like
The unbundled route is a term policy for protection and a separately held fund for investing. Term insurance, in MoneySense's words, is the simplest and usually most affordable protection product, with no cash value and no investment risk. The investment half is whatever low-cost diversified fund suits your horizon and risk profile; an index-tracking unit trust or exchange-traded fund is the common choice, and MoneySense itself suggests unit trusts and ETFs for people who do not need the insurance element.
Running the comparison properly
The comparison only means something if both sides are set up to deliver the same thing. Work through these steps with the ILP's product summary and policy illustration in front of you.
- Equalise the protection. Note the ILP's sum assured, its disability definition and the age cover ends. Get a term quote for the same sum, definition and end age. This is the first number.
- List every ILP charge. Policy illustrations show the cost of insurance, fund management fees, policy or administration fees, any bid-offer spread or premium allocation in the early years, and switching fees beyond the free allowance. Add them up year by year, not as a single percentage.
- Compare the same sub-fund outside the policy. MoneySense points out that the sub-fund you like may also be sold as a unit trust without the insurance wrapper. If it is, the difference in annual cost is the wrapper's price.
- Use the same return assumption on both sides. An ILP illustration uses assumed growth rates that are neither promises nor limits. Apply the same rate to the fund you would hold outside, after its own fees.
- Project to the same date. Total premiums in, total charges out, projected value at the horizon, and the protection held throughout. Only then do you have two comparable columns.
A table helps keep the columns honest:
| Item to compare | ILP | Term plus fund |
|---|---|---|
| Death and TPD cover | Sum assured or unit value, per contract | Term sum assured |
| Insurance cost | Deducted in units, rises with age | Fixed term premium for the term |
| Investment charges | Fund fee plus policy-level fees | Fund fee only, plus platform cost if any |
| Guaranteed value | Usually none | None on the fund; none on term |
| Flexibility | Switch sub-funds, vary cover, partial withdrawals | Sell units, change term cover separately |
Where the honest comparison usually lands
For a buyer whose main goal is protection, MoneySense's guidance is direct: term insurance may offer higher cover at lower cost. For a buyer whose main goal is investing, the question is whether the ILP's features, such as free fund switches, the ability to vary cover without a new application, and the discipline of a fixed monthly premium, are worth the extra layer of charges. For some people the answer is yes, particularly those who would not invest at all without the structure. For many it is no.
Two further points matter. First, ILPs are suited to long horizons because early charges can take years to recover; a short horizon almost always favours the unbundled route. Second, some ILPs are classed as Specified Investment Products, and the LIA notes that insurers must assess your knowledge and experience before selling them without advice. If that assessment is needed, treat it as a signal to slow down.
Before you decide
Read the product summary and policy illustration rather than the brochure, and check the sub-fund's objective, risk classification and track record. Review your annual ILP statement if you already hold one; MoneySense advises checking that the units and sub-funds still fit your needs. If you are weighing an ILP against selling an existing policy, remember MoneySense's warning that replacing a product in its early years can be costly.
Our comparison page lists current ILPs with their published charges and fund ranges, and the coverage gap check shows whether protection or savings is the larger gap in your situation.
Talk to an advisor
The arithmetic here is not difficult, but it needs the actual illustration figures for the plan you are offered, and it needs someone willing to put the unbundled alternative next to it. A licensed advisor on the portal can do both. Use the matching tool to find one, or ask our assistant to explain any of the charges named in this guide.
Sources
This content is educational information from a licensed advisor, not financial advice. Product details vary by insurer — verify specifics with an advisor.
