Advantages and disadvantages of an ILP
1. High flexibility – Not only can we adjust the insurance coverage at different stages in life to suit our needs, but we are also allowed to withdraw the account value for quick cash, or even take a break from paying the premium when we face financial difficulties.
2. Leverage your money – With an ILP, your money is essentially multitasking to help you achieve multiple purposes all at once. “One dollar doing the work of many” allow us to keep ourselves on track in life before deciding which is more important to us, wealth accumulation or wealth protection?
3. Low insurance cost with flexibility – The insurance component in an ILP function just like a term plan, but with greater flexibility. The insurance cost is extremely low when we are young, and we also enjoy the freedom to increase/decrease the coverage as we wish.
4. Potentially higher return with full Control over funds invested – Unlike a participating plan (typically referring to an endowment plan or whole life policy), you will have full control over the investment decision in an ILP. Chasing after an aggressive portfolio for higher long-term growth or shielding your funds with a safer portfolio during the tough time to minimize losses, it is all on your call.
1. Potentially high initial sales charge – ILP will usually impose high initial sale charge, thus rendering it unsuitable for people with short investment horizon as it could deeply affect your overall return in the first few years. The longer that we can stay invested with an ILP, the lower impact it will have to our overall portfolio returns.
2. High insurance cost when we age – Insurance cost for an ILP could rise quickly as we age, causing us to face the problem of having to reduce insurance coverage at old age when it is needed the most. These could also lead to having little or no growth in the account value due to the high insurance cost, despite having an excellent investment return.
3. Zero protection for the policy returns – Since we enjoy full control over the investing sub-funds, we are also exposed to the full investment risk with no guaranteed returns or downside cap. As such, it is 100% our responsibility for the portfolio’s performance and the choice of sub-funds. Having a poorly managed investment portfolio could be highly detrimental our financial position over the long run.
4. Limited choice of funds – Unlike the local fund houses or brokerage firm which can easily offer hundreds or thousands of fund choices, the range of unit-trust available for selection in an ILP is rather limited, typically less than 50.
5. Early partial withdrawal charges –Withdrawal or surrender of ILP in the first few years upon inception are usually either not allowed, or you will be charged at the pre-determined rate for the amount withdrawn. This is similar to the participating plans(savings plan or Wholelife plan) whereby the surrender value in the first few policy years will be extremely low.