Thursday, June 11, 2015

Investment-Linked-Plan (ILP)

Let’s talk about ILP. I had signed up one ILP right after I got my first job in Singapore. It is from AIA, 100% into AIA Acorns of Asia Fund, with a monthly cost of S$203.26. I can choose to continue to pay this ILP up to 77 years (I will be age 101 by then), that is why I say ILP payment is forever and ever. Of course, you can choose to surrender anytime you want and I am going to do it at around age 65 while it is at BULL market, this is very important. If I see a super bull market at age 60, I will also consider surrendering the policy too. I give myself a time horizon of at least 35 years. It has to be, at least, like the BULL market in year 2007. Let’s put it that way, by then, STI shall be way above 5,000 points. Don’t you think so?

So, this ILP comes with S$100,000 life insurance, S$100,000 critical illness benefit as well as S$90,000 TPD (Total Permanent Disability). Take note, S$203.26 monthly with S$100,000 sum assured if you sign up the package at age 23. If you sign up the package at the later age, the sum assured will get lesser as well, vice versa. ILP is just like stocks or I would say ETF, they take your money and invest in equities and you can check the fund sheet and annual report to know the top 20 companies they have invested. So, it makes perfect sense to do a monthly purchase to average out the market volatility, you do not want to make a yearly premium in this case as you might be really unlucky to purchase during the “bull market” always.
ILP has no GUARANTEE payout. In worst case scenario, you might even loss money due to the poor fund performance. You will also incur losses if you surrender the policy too early. The market term of breakeven is always 7 years. How does my ILP fund perform so far after 11 years? It is simply BORING.
The fund house is required to project the return based on 5% and 9% during my time. I think the projected return percentage was revised lower by MAS lately.

I just checked my fund surrender value today; it is S$26,135.43.  Do I meet the projected return?

Well, after 11 years of payment, their projected 5% is S$25,000 and 9% is S$31,800. It seems like my fund performance hit the high 5%. It sounds OK but is this really the case?
The true amount I put it in is S$203.26 x 12 months x 11 years = S$26,830.32. Where is the 5% gain here? If I sold it today and get back S$26,135.43. I will still incur a loss of S$694.89 after 11 years.

Okay, this is the problem. Not all the monies, S$203.26, goes into the funds, it has administration charges as well. As for my total cost per month is S$203.26 and I expect GAIN, not breakeven after considering all the fee charges. So, what should I do now?
Here is the plan. The number will become great if you surrender at the BULL market; see the number at age 30 (above illustration table). The projected 9% is S$15,100 and the surrender value is even higher at S$17,018 (sound like a 10% gain for me). But again, is this really hitting 9% P.A. gain, you should work out the number precisely when you consider surrendering the policy.
So, what should I do next? I won’t surrender this ILP simply because I got it “cheap” at age 23 with sum assured of S$100,000. At least I have additional S$100,000 insurance coverage here beside my other health insurance. As I said, I am looking at 35 years horizon time and I need to search/wait/catch a really cool BULL market and it shall and it will happen. By then, hopefully, I will have some meaningful gain; I would not know how many % (P.A.). It won’t be great, so the only extra thing you have here is the extra S$100,000 insurance coverage, that’s it.
Of course, if you really time the market correctly with the right fund, for example, buying China fund last year and the current value is almost 100% gain, but with ILP monthly purchase, you won’t see crazy profits here too simply because your monthly payment has average out all the volatility.
So, will my AIA Acorns of Asia fund doing great in the next 25 years? You bet.
Will I get crazily good profits out of it? No.
(Next I will talk about Endowment plan) 

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