Friday, 7 June 2019

The Pros and Cons of Investment-Linked Policies (ILPs)

I've previously written on why I cancelled my investment-linked policy (ILP), and provided another reason based on the way allocations are seemingly done in ILPs.


Since then, I've only been getting much flak (mostly from insurance agents) about my stance on ILPs, and I've been pressured to write a post showing the flip side of it, since there are no bad products, but only bad advice, correct?

So here's the other side, but before you read the details, you ought to first know a few things:
  • My stance on ILPs still hasn't changed, and I'm still not keen on ILPs and won't get one for myself. However, over the past few years, I've come to realise that there are some (a very, very small group of) people who might be suitable for them.
  • I'm not a financial advisor so this should not be taken as financial advice. If you have any questions regarding your own policies, please speak to a licensed advisor whom you can trust to operate in your best interests.
  • This is NOT a sponsored article.
An Investment-Linked Policy is often marketed to potential clients as a "Savings Plan" or a "Wealth Accumulation Plan". Many traditional ILPs sold today consist of two components which integrate both insurance and investments together into a single plan, which means your premiums paid are being used to achieve two concurrent goals - protection and growth.

Here are some selling points that agents usually use to justify your purchase of an ILP, and my rebuttal towards them:
  • "Your premiums remain the same even though your cost of insurance goes up"
    This is true, but only because of the assumption that your invested capital will be generating good returns that are more than sufficient to cover the cost of your insurance. Should your investments do poorly and your premiums are no longer sufficient to pay the mortality charge, then your policy might just lapse.
  • "Your money is achieving not one, but TWO goals for you! Insurance plus investment, all in one product"
    They just don't tell you about the higher costs involved, which can go as high as 18% in the case of my friend here. And you guys already know about the costs involved in mine...
  • "It can give you higher potential returns than simply getting a term or whole life insurance plan"
    Those returns aren't guaranteed, my dear. I terminated mine early so I certainly didn't get these higher returns that were promised to me, but my friend here held onto hers for a total of 9 years and 3 months. Guess what was her annualized return? 0.92%!
Since ILPs are often compared to Whole Life Insurance, so I'll use that as a basis of my comparison here as well.
I met an insurance advisor who's pretty active in the Seedly community to understand
his take on this, and this was the argument he presented to me.
Do note though, that I'm an advocate of term over whole life insurance as it is a more cost efficient method of getting the same level of protection, and you can read my take on whole life vs. term insurance here. However, a case can be made for whole life if you're looking to combine with critical illness protection, as I recently outlined in the linked post.

So are ILPs pure evil? Not exactly.

Two benefits in ILPs that I can think of would be:
  1. Discipline - for someone who is totally not disciplined in their finances (don't we all know some folks like that?), an ILP helps to address this gap by taking a sum of their money each month to cover for both insurance and investment.

    Of course, I'd argue that you should always keep your investments and insurance separate, but I've met people who are too busy / lazy to pick up investments even if I simplify it down to an ETF or even a Regular Shares Savings Plan. For these folks, perhaps a combination of term insurance and a pure investment ILP might just work, although they'll essentially be paying someone else a fee to manage their investments for them.
  2. Access to investment funds - some ILPs offer access to exclusive funds that you'll be hard-pressed to find anywhere else (unless you have a sizeable investment amount to give to the fund managers) and at a lower upfront capital, too. Others offer free fund-switching, which isn't something you can always get in the real world when you're doing your own direct investments. 
But here are the types of folks whom I don't think will be suitable for ILPs:
  • Active traders / investors - if you're already doing direct investments, why pay someone else to do it, unless you're absolutely sure that they "confirm guarantee chop" can generate higher returns for you?
  • Folks who aren't interested in the ILP's underlying funds - you can check out the whole list of funds that your ILP offers, but be forewarned that that's a pretty long list. If none of them appeal to you, then you're better off without.
  • Naive fresh graduates who buy ILPs from their friends who are fresh insurance agents - one benefit of ILPs lies in how well you and your agent work together to manage them. The best agents constantly monitor the various funds, provide you with updates, and sometimes even reach out to the respective fund managers to understand their performance or strategy in order to evaluate if it'll match yours. And while age and experience is certainly not a good gauge of how financially savvy your advisor is, you ought to question what advantage your friend can offer you in contrast to you doing your own investments.

    For folks under this profile, you might just be better off investing in ETFs/RSS plans while learning how to do your own investments. And you might eventually just find that you enjoy investing better than leaving someone else to manage your investments, too.

TLDR: So are ILPs good or bad?

ILPs aren't bad financial instruments per se, but they're not suitable for everyone or anyone. A lot of the online literature points to ILPs as a bad idea, and I sought out to hear from the other side without bias.


If you lack discipline in your savings and investments, and can't even be bothered to invest into a low-cost ETF or RSS plan, then an ILP might just be the vehicle for you, at a price. You'll be paying the impact of these fees for having someone manage your investments for you, but it'll be better than if you didn't do any investments at all.

However, the main reason why ILPs aren't fantastic is largely due to their high costs involved in paying your agent, the insurer, and the fund manager, to manage your money for you. These are fixed expenses, which means that no matter whether your policy makes money or not, these people still get paid. You, on the other hand, might get less of your capital back if your ILP funds do not perform well, although many of them will tell you otherwise when selling you a plan. 

In investing, costs are always real, whereas returns are never guaranteed.

If you're already stuck with an ILP and you're contemplating whether to terminate it, speak first to your financial advisor, or find another agent you trust who can advise you (without selling you a new ILP or any other policies). As for myself, I cancelled mine (as you can see from my story here).

There are cheaper and more cost-efficient ways to get insurance and investments. For me, I do it through term insurance + investments in ETFs, bonds and stocks. I don't see a need for an ILP in my own life, and prefer to do my own investments instead.

What about you?

With love,

Budget Babe

Tuesday, 4 June 2019

Review: Standard Chartered Bonus$aver

What you need to know about the account before you sign up. Get 1.8% - 2.13% p.a. realistically on the first S$100,000 only if you're willing to put your spend on a Bonus$aver card, and note the conditions on the invest/insure tier!

Salary crediting is a precious commodity. Many of the banks reward you if you do credit your salary into your high-yield savings account with them, but with so many options and only one salary credit choice, which one should you choose?

For those of you who earn more than $3,000 and spend at least $500 each month on a credit card, you have two options to choose from: OCBC 360 or Standard Chartered Bonus$aver.

Notes:
  • UOB One is another fantastic option, but you could still qualify for the bonus interest by spending $500 on their credit card (the UOB One Card is a pretty good cashback card) + 3 GIRO transactions. This frees up your salary credit for another account.
  • Bank of China SmartSaver offers a generous headline rate as well, but it works better for high income-earners (more than $6,000 a month) and high spenders (>$1,500 credit card spend each month). One of their biggest downsides, though, is that their online banking interface is extremely cumbersome, and they've much fewer bank branches across Singapore. If you don't mind the hassle of navigating a poor user-friendly site in exchange for higher interest, then this account might just be best for you.
For the reasons above, I've zoomed into OCBC vs. SCB for someone who can do a salary credit + credit card spend + bill payment, and in this comparison, the Standard Chartered Bonus$aver wins IF you're willing to put your spend on a Bonus$aver card.

Since several of you have asked me about this account recently, I'll zoom into the SCB offering today. Before you sign up, please note the pros and cons of this account, and evaluate if it'll be the best match to your personal and financial circumstances:

Here's the criteria fulfilment:
  • Salary credit of min. $3,000
  • Spend at least $500 monthly on any SCB credit card
  • 3 bill payment of min. $50 each
  • Insure or invest with SCB  I won't do this, and you might want to think twice too
If you've $75,000 of funds to park aside, you could be getting more than $1,600 every year through this account. Here's how the interest breaks down (feel free to play with your own variations here):



So this would equate to salary credit + credit card spend + 3 bill payments on the SCB account to enjoy higher and sustainable interest. In contrast, performing the same actions on the OCBC 360 account would give you about $140 less every year. However, if you earn less than $3,000 of salary then OCBC would be a better choice between the two, due to its lower ($2,000) salary credit requirement.

Limitations 

In contrast to other high-yield savings accounts, SCB has chosen to restrict their customers to spending only on Bonus$aver Cards, instead of picking from their other credit card choices. What's more, the card itself is neither a good cashback nor miles credit card - it is really just to help you meet the bonus 0.78% interest in your Bonus$aver account. 

This means you cannot pair it with the Standard Chartered Unlimited Cashback Cardwhich is among the bank's top credit cards as it gives you 1.5% unlimited cashback. 
In this regard, OCBC becomes superior because it allows you to pair it with any of their credit cards, such as the OCBC 365 Card - just note the (higher) minimum spending of $800 monthly for the bonus cashback.

Another huge downside I see is that the insure/invest tier is highly prohibitiveI personally would not even consider it for the following reasons:
What's more, SCB only rewards you bonus interest for this tier for the first 12 months after purchase, which means if you wish to continue enjoying that 0.75% of bonus interest, you'll have to buy another (expensive) insurance policy / unit trust again. Thanks but no thanks.

Remember, never commit to something long-term for the sake of your short-term (bonus) interest. You're only more likely to regret that later on.

Nonetheless, if you feel you can still meet the 3 criteria, here's what you can earn:


However, if you're a disciplined saver and you're confident of increasing your monthly savings by at least $500 every month, then OCBC 360 would serve you better.



Remember to play around with the calculators on both banks websites before you commit to opening an account with them. 

Sign up gifts:

From what I can see, Standard Chartered is currently offering three different gifts - free wireless headphones or a travel luggage - depending on how much funds ($10k - $50k min.) and whether you open an account with them online or at one of their branches.

Personally, I'd always pick cold, hard cash over physical gifts anytime, and if you feel the same, then SingSaver's promotion looks more attractive as you can get S$100 when you open a SCB Bonus$aver savings account through them. 

You can apply here, and read the terms and conditions here. I can't really find any catch except that you need to remember to submit the rewards form to SingSaver, but that's about it.

Conclusion

"Enjoy our highest interest rate of up to 3.88% p.a." is the bank's claim on their Bonus$aver account. However, don't be fooled by the headline rate and rush to sign up, because you need to understand that it comes with certain limitations as mentioned above. 

The account can certainly offer you higher interest than OCBC 360, but if you're someone who wishes to optimise your credit card spending on a good cashback/miles card, then you might have difficulties meeting the Spend criteria as well.

From what I can see, two improvements need to be made for the account to win over more customers from its competitors, and they are:

  • Allow the credit card spending criteria to be on any SCB credit card, instead of restricting it to only Bonus$aver cards.
  • Reduce the minimum sum needed to qualify for the insurance and investment tier.
If these two changes are made, then I'm pretty sure the account will be a no-brainer pick over OCBC 360.


Between the two accounts, which do you prefer? 

With love,
Budget Babe

Disclosure: Affiliate links have been included in the above article. If you choose to sign up via my affiliate link, I'll earn a small referral sum at no additional cost to you.