What is an Investment-Linked Policy (ILP)? What are Questions You Should Ask Before Buying That ILP? (Part 2 of 2)
Introduction
In my previous article, I discussed how Investment-Linked Policies (ILPs) are a topic of much debate within financial planning circles. I explained what an ILP is, how it differs from traditional insurance-based solutions such as endowment plans and whole life policies, and examined the advantages and disadvantages of ILPs. I also explored which groups of individuals an ILP may be suitable for. Ultimately, my view was that proper financial planning must be undertaken before determining whether an ILP aligns with a person’s financial portfolio and long-term aspirations.
In this article, I will outline the key questions and considerations you should be reflecting on—and discussing with your financial planner —during the planning process. This forms an essential part of your due diligence before deciding whether to commit to an ILP. This is particularly important because ILPs can be complex products, and once purchased, early surrender often results in significant charges that may leave you financially worse off.
Before You Commit to an Investment-Linked Policy (ILP):
12 Key Areas to Reflect On
1. Understand the Fees and Charges
Before committing to an Investment-Linked Policy (ILP), it is important to take a step back and ensure you fully understand what you are signing up for. ILPs typically include insurance charges that increase with age, fund management fees, policy fees, and charges for any additional riders. These costs can materially impact the investment value of your policy, especially in the early years.
It is worth asking whether you understand which charges are deducted on a monthly basis, how those charges evolve over time, and whether your adviser has shown you projections of these charges at older ages, such as 60 or 65. Transparency builds confidence, and you should feel comfortable asking for clear and detailed breakdowns.
2. Know Why You Are Choosing an ILP
Being clear about why you are choosing an ILP instead of an endowment plan or a whole life policy is equally important. Every policy serves a different purpose. ILPs offer flexibility in premiums and coverage, access to curated investment funds, and the potential for higher long-term returns linked to market performance.
Endowment plans are generally more savings-focused, tend to provide more stable and lower-volatility bonuses, and are often suited for specific milestones such as education funding. Whole life policies prioritise lifetime coverage, guaranteed values, and typically fixed premiums. Choosing an ILP should not be based solely on a recommendation; it should be driven by your own objectives—such as whether you value flexibility, are comfortable with market risk, and prioritise long-term growth over guarantees.
3. Be Realistic About Your Time Horizon
ILPs are designed as long-term instruments. If you expect to exit within two to three years, market volatility and low early surrender values will work against you. In most cases, a time horizon of seven to fifteen years allows the investment strategy sufficient time to play out.
4. Understand How Premium Holidays Work
One commonly highlighted benefit of ILPs is flexibility during periods of cashflow stress. However, premium holidays are not cost-free. Your policy must have sufficient value to continue paying insurance and policy charges, and if it does not, the policy may be adversely affected. It is important to understand what happens if the fund value cannot sustain these costs during a premium break.
5. Accept That Returns Are Not Guaranteed
A key mental shift required for ILPs is accepting that returns are not guaranteed. Unlike endowment or whole life policies, ILP values fluctuate with market movements and fund performance. If you are uncomfortable seeing your policy value decline temporarily—even if markets recover later—an ILP may not be the most suitable choice.
6. Understand Fund Selection and Switching
You should have clarity on how your money is invested. This includes knowing which funds are available, whether fund switching incurs any costs, and how frequently your portfolio should be reviewed. Some modern ILPs offer auto-rebalancing features, which can be helpful for those who prefer a more hands-off approach, but these features should still be clearly understood.
7. Plan for Protection Costs at Older Ages
Insurance charges increase as we age and may eventually consume a larger portion of the policy’s units. Having clarity upfront allows you to plan whether coverage should be adjusted later, whether allocations should gradually shift toward more investment-focused strategies, and how to maintain the long-term sustainability of the policy. It is far better to have this conversation early than to be surprised at age 55 or 60.
8. Ensure It Complements Your Existing Portfolio
An ILP should be assessed in the context of your existing insurance portfolio and broader financial plan. It should not function in isolation. Consider whether you already have sufficient term coverage, whether you require additional critical illness or disability protection, and how this policy fits into your retirement and wealth planning strategy. An ILP is ultimately a tool—and tools belong within a well-constructed plan.
9. Expect a Balanced Recommendation
A responsible recommendation should include a balanced discussion of both the advantages and limitations of an ILP. Your financial planner should be able to explain clearly when an ILP is suitable and when it may not be the best option. Transparency reflects good stewardship and helps build long-term trust.
10. Consider Your Adviser’s Perspective
It is reasonable to ask whether your planner has personally purchased a similar ILP. If not, understanding the reasons can provide useful perspective. This is not about expecting identical decisions, as circumstances differ, but about gaining insight into how the adviser weighs the product’s benefits, costs, and long-term commitment.
11. Commit to Ongoing Reviews
Finally, consider whether you have someone who will review the policy with you on an ongoing basis. Markets change, life stages evolve, and needs shift over time. Regular reviews help rebalance funds, adjust coverage, and prevent charges from eroding value unexpectedly. An ILP is not a “buy-and-forget” product; it requires ongoing attention and partnership.
12. Ask Why “Buy Term and Invest” Is Not Being Considered
It is worth asking your planner why the alternative strategy of buying term insurance and investing separately through an investment platform has not been recommended. This approach can offer greater cost transparency, flexibility in investment choices, and—importantly—a guaranteed death benefit from the term policy, independent of market performance.
By separating protection and investment, you may be better able to assess whether you are adequately insured while retaining full control over how your investments are managed and accessed. While this strategy may not be suitable for everyone—particularly for those who value the convenience of a bundled solution—it should nonetheless be discussed as part of a comprehensive and objective planning process. Understanding why this option is or is not appropriate for your situation enables a more informed comparison with an ILP.
Conclusion
Investment-Linked Policies can be useful tools when applied appropriately, but they are not inherently superior to other financial solutions. Their complexity, long-term nature, and exposure to market risk make it essential for individuals to approach them with clarity, patience, and a clear understanding of trade-offs. Asking the right, and tough questions—about costs, suitability, alternatives, and long-term sustainability—helps ensure that decisions are driven by strategy rather than sales narratives. I wish I did before committing into one in the late 1990s.
Ultimately, good financial planning is not about choosing products in isolation, but about aligning tools with objectives, risk tolerance, and life stage. A competent adviser should welcome scrutiny, present balanced recommendations, and revisit plans as circumstances evolve. When selected thoughtfully and reviewed regularly, an ILP can support long-term goals; when chosen without sufficient understanding, it may become an unnecessary financial burden. Sound decisions begin with informed conversations, clear alignment, and disciplined planning.
Article by Leon Loh
Email: leon.loh@gen.com.sg
Article written in December 2025
