What is an Investment-Linked Policy (ILP)? What are Questions You Should Ask Before Buying That ILP? (Part 1 of 2)
Introduction
In today’s landscape of rising insurance premiums, evolving investment options, and increasingly cost-conscious consumers, it is no surprise that Investment-Linked Policies (ILPs) have become a topic of debate. A flurry of media discussions has emerged around how good—or how “not so good”—these products really are, with commentary from well-known figures in the personal financial services space. Some people appreciate the flexibility ILPs offer, while others worry about market volatility and layered charges.
According to official data from the Life Insurance Association, insurance sales in 2024 were exceptionally strong, driven largely by ILPs, which surged 41% from the previous year (Life insurance sales in S’pore up nearly 20% in 2024, driven by surge in investment-linked plans | The Straits Times). At the same time, ILP-related complaints also rose, with 211 cases reported to the Financial Industry Dispute Resolution Centre (Fidrec), mainly involving mis-selling, inadequate disclosure, and other market-conduct issues (Concerns raised over investment-linked insurance plans as demand for them goes up in S’pore | The Straits Times).
Like most financial instruments, ILPs are neither inherently “good” nor “bad.” The real question is whether they are suitable for a particular individual. What works well for one person may be completely inappropriate for another, simply because financial circumstances, needs, and objectives vary so widely. This principle applies not only to ILPs but to nearly every financial product available today.
This article explores how ILPs work, their advantages and disadvantages, and the types of individuals they may—or may not—be suitable for. I personally purchased an ILP in the late 1990s, but the product landscape has changed significantly over the last 30 years. Early ILPs were often protection-heavy, whereas modern versions tend to focus more on investment and wealth accumulation.
What Is an Investment-Linked Policy (ILP)?
An ILP is a hybrid financial product that combines life-insurance protection with investment funds—typically unit trusts. A portion of each premium pays for insurance charges, while the remainder is invested into the selected funds. Returns are not guaranteed and will fluctuate based on market conditions and fund performance.
ILPs emerged during a period when financial markets were maturing and consumers were seeking more than just traditional insurance. With the rise of unit trusts, equities, and bond funds, people wanted insurance products that also allowed them to participate in market growth. ILPs were developed to meet this dual need for both protection and wealth accumulation—a combination that also motivated me personally to purchase one many years ago.
Although ILPs are offered by insurers, they differ significantly from traditional whole-life and endowment policies. The table below highlights the key differences:
Having seen the key differences between an ILP and the traditional insurance-based solutions, what advantages do ILPs offer? And what the drawbacks?
Advantages of ILPs
One of the main advantages of ILPs is their flexibility. Policyholders can adjust premiums, coverage, and fund allocations as their financial needs evolve. ILPs also provide access to curated funds managed by professional fund managers, with many offering automatic rebalancing to maintain desired risk levels.
Another key advantage is the potential for higher long-term returns compared to traditional savings or endowment plans. Many modern ILPs also award bonus units, which help the policy accumulate value during periods of lower fund prices. Some ILPs waive certain fees after a number of years, making them more effective for long-term wealth accumulation. Many plans support dollar-cost averaging and include advanced features such as watermark benefits, which ensure the death benefit remains protected even if investment values fall.
In addition, ILPs offer premium holidays, allowing policyholders to pause payments during times of cashflow stress if the policy has sufficient value to sustain itself. Riders—such as critical illness, early critical illness, and disability benefits—can also be added to enhance overall protection.
Disadvantages of ILPs
Despite their benefits, ILPs come with several important drawbacks. Their fee structures can be complex, incorporating insurance charges, fund management fees, and policy fees, all of which may significantly erode returns. ILPs also carry market risk—returns are not guaranteed, and policy values can be volatile, especially in the early years. Policies without a watermark feature may also pay out less than the total premiums paid in the event of death.
Early termination is another concern. If a policy is surrendered too early, the cash value may be lower than the premiums paid. For protection-oriented ILPs, insurance charges also increase with age, resulting in escalating costs over time.
Who Might ILPs Suit Given the Advantages and Disadvantages?
Investment-linked policies may be well-suited for individuals who value a high degree of flexibility in their financial planning and prefer a single product that combines both insurance coverage and investment potential. These plans tend to appeal to those who understand and are comfortable with market volatility, recognising that ILPs do not provide guaranteed returns and that their values will fluctuate with market performance.
ILPs may also suit individuals who appreciate access to professionally managed funds and investment tools such as auto-rebalancing, dollar-cost averaging, and free fund switching. Younger individuals or those with long investment horizons may benefit the most, as they have time to ride out short-term fluctuations and potentially achieve higher long-term growth than traditional plans typically allow.
They may also be appropriate for people who anticipate changes in their financial circumstances and want the ability to adjust premiums, coverage levels, or fund allocations over time. This flexibility can be especially valuable during major life transitions such as career changes, marriage, starting a family, or saving for long-term goals. Finally, ILPs are often attractive to those who want to customise their protection through optional riders such as critical illness or disability benefits, creating a more comprehensive and personalised insurance solution.
Conclusion
ILPs have been widely discussed in recent years, with strong opinions on both their strengths and weaknesses. Ultimately, they are simply financial tools—neither inherently good nor inherently bad. Their effectiveness depends entirely on how well they fit an individual’s financial situation, objectives, and risk tolerance. With proper analysis and a clear understanding of personal goals, an ILP may be suitable for some individuals. The reverse is equally true: one person’s ideal solution may be another person’s costly mistake.
A competent financial planner should thoroughly assess your circumstances before recommending an ILP. In a follow-up article, I will outline the key questions individuals should ask before committing to one. As with many insurance products, early surrender of an ILP can result in significant charges, so careful due diligence is essential before making a long-term commitment.
Article by Leon Loh
Email: leon.loh@gen.com.sg
Article written in November 2025
