We've seen the recent headlines from the Business Times about Investment-Linked Policies (ILPs), specifically Investment-linked insurance plans: That welcome bonus could cost more than you expect”, Investment-linked insurance products: complexity label a long time coming and many more.
Here at FSMOne Insurance, we want to reiterate our position from the start: We do not offer ILPs.
Given that many clients we've reviewed purchased ILPs without fully understanding them, we are sharing our perspective to help shed light on this complex product.
What is an Investment-Linked Policy (ILP)?
An Investment-Linked Policy (ILP) is a type of life insurance that combines insurance and investment into a single product. When you purchase an ILP, a part of your premium is allocated to professionally managed sub-funds. By investing your premiums in these sub-funds, such plans offer the potential for higher returns. The remainder of your premiums then goes towards paying for your insurance, and other administrative costs.
How ILPs are structured:
- 100% of your regular basic premium is used to buy units at the unit price of your chosen Fund(s).
- The death benefit given to your main plan will be 101% of your account value or premiums paid. Units of your chosen fund(s) will be sold to pay for this cost of insurance fee. Cost of insurance is based on attained age and tend to increase with age.
- Units may also be sold to pay for your administrative charge, policy fee, supplementary charge, and any other relevant fees.
Important terms to know for ILPs:
- Minimum investment period (MIP): ILPs come with a minimum
investment period (MIP). This refers to the “lock-in” period of
your policy where basic premiums must be paid to avoid incurring premium
shortfall charges. During the MIP, charges will also apply should you make a
partial withdrawal or choose to surrender or make any early termination of your
policy.
The MIP and charges applicable will vary between insurer and plans. Refer to your product summary if you would like to find out more details about your plan. - Cost of insurance: A fee will be charged on the insurance component provided in your policy. This refers to the 101% death benefit given with these fees charged separate from the premiums needed for your insurance rider. A cost of insurance will be charged if your account value drops below the total premiums paid.
- Premium holiday: Touted as a benefit of ILPs, your policy will remain in effect with the premium
holiday automatically taking effect once overdue premiums remain unpaid after
the end of the grace period. However, do note that premium shortfall charges
may be incurred upon the activation of this feature. Fees such as
administrative charge, policy fee, supplementary charge are still payable even
during a premium holiday.
A similar feature -Automatic Premium Loan (APL) is also available in whole life plans. This feature will be triggered if the policy has sufficient surrender value and premiums are not paid even after the grace period. Interest will be charged if an automatic premium loan is triggered. - Welcome Bonus/Bonus units: This is a common promotional feature typically designed to boost the policy's investment value in its initial period. The Welcome Bonus is paid to the policyholder in the form of extra investment units (or "bonus units") that are added to the policy's account value. It is usually calculated as a percentage of the first year's regular basic premium (e.g., "Get up to 40% more units in the first policy year"). While the Welcome Bonus puts more units into your account early on, it is crucial to remember the policy's overall long-term fees and the significant penalty for early withdrawal.
Myth 1: ILPs give you the best of both worlds
ILPs are touted as a plan that combines insurance and investment, allowing you to simultaneously do both with one plan. However, most ILPs offer minimal death coverage with a death benefit of just 101% of your account value or total basic premiums paid. While some ILPs may offer the option to add on riders for a higher death cover, doing so could reduce the amount of premiums that goes into your investment portion. There may also be a cap on the amount of coverage you can choose, or you may be required to pay a higher annual basic premium for your desired coverage amount.
ILPs also come with hefty fees such as an administrative charge, policy fee, surrender charge (during MIP), partial withdrawal charge (during MIP), premium shortfall charge (before flexi start date), supplementary charge, and management charge. These fees may reduce the overall returns of your ILP.
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ILP |
DIY investing |
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You can expect to pay 2.5% to 5% during MIP for the administrative fee, supplementary charge, and policy fee of your policy. |
Fees for investing platforms start from just 0.2% per annum for the platform fee and offer 0% sales charge on your investments. Click here to find out how FSMOne can help you to invest globally and profitably. |
Myth 2: An ILP can give me sufficient insurance coverage
There are two ways to use an ILP for insurance coverage:
(a) Using the death benefit from the main plan for coverage.
This option provides the lowest death benefit relative to the premiums paid, as it is typically only 101% of the account value or total premiums paid. For example, if you have paid a total of $100,000 in premiums and account value is $80,000, the death benefit will be $101,000.
(b) Adding an insurance rider to your ILP for additional coverage.
This allows you to choose a higher sum assured than the standard 101% death benefit. The premiums for this rider can either be paid in addition to the main plan premiums (giving you higher coverage without being limited by the main plan) or be included within your main plan premiums (this would limit the coverage amount you can choose).
According to the MAS Basic Financial Planning Guide, individuals are recommended to have 9 times of their annual income for death and total permanent disability coverage. While you can use an ILP rider to obtain this coverage, you may have to pay higher premiums to achieve this.
Yearly premiums for ILP rider vs Term Life plan:
Premiums used in the chart are plans that cover for death and terminal illness only. Information retrieved on 30 September 2025, for illustration purposes only.
As shown in the chart above, the premiums for the ILP insurance rider are significantly higher compared to a term life plan. Furthermore, unlike term life plans that offer fixed premiums throughout the policy term, ILP rider premiums increase with age and could end up being a hefty cost to bear at an older age.
Myth 3: ILPs are cost-effective.
“ILPs may not necessarily cost more than term or whole life insurance plans.” While this statement may be true in certain scenarios, particularly when we focus only on the insurance component (i.e. the riders purchased for additional coverage beyond the basic 101% death benefit provided under the ILP), there are other factors to take into consideration.
Profile: Non-smoker Singaporean male (date of birth: 1 January 1990). For death and terminal illness coverage for the whole of life.
^Assumption
is made that the account value is greater than the premiums paid and thus cost
of insurance is $0. Insurance rider will only cover up to age 85 and will
terminate after. Information generated
on 26 September 2025, for illustration purposes only.
*Coverage
increases over the years and correlates to the premiums paid. A lower death
benefit may be given if the funds under-perform projected returns.**Coverage
given is made up of a guaranteed and non-guaranteed component.
In the table above, we added an insurance rider to an ILP to compare the coverage and total lifetime premiums paid for ILPs, whole life, and term life insurance plans. This ILP insurance rider provides coverage up to age 85 (Age Last Birthday). Following which, the rider will terminate and coverage under this rider will cease. Once this rider terminates, the overall coverage of the ILP will be reduced accordingly. While the total lifetime premiums paid for this ILP rider (assuming account value is sufficient, and cost of insurance is $0) could potentially be lower than a whole life or term life insurance plan, the condition to getting this ILP insurance rider is a total basic premium of $250,000 required over the insured’s lifetime. This basic premium is then used for the insurance rider, cost of insurance for basic plan, and the investment component. The comparison above also assumes that the investment returns will meet projections. However, if the investment underperforms, you could end up with lower-than-expected coverage.
The higher premium commitment required from the individual raises the question of whether an ILP is truly a cost-effective option. It is also important to note that any deviations from the committed premiums may affect the outcome and could result in additional costs incurred if premiums are not paid during the MIP.
Myth 4: “Bonus units" (such as Welcome Bonuses or Loyalty Bonuses) means "free money"
You might have the perception that the welcome bonus is a gift or an extra return from the insurer. The reality is that these bonuses are often a marketing tool designed to mask or offset the impact of the policy's high internal fees and charges, especially in the early years.
|
Aspect |
The Myth (What is Often Implied) |
The Reality (The Hidden Cost) |
|
Offsetting Fees |
The bonus adds to your investment units, giving you a head start. |
The bonus is often necessary just to offset the massive fees taken in the early years (known as "front-end loading" or high administrative/surrender charges). |
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Premium Allocation Rate |
100% (or more, due to the bonus) of your premium is invested from day one. |
For many ILPs, the Premium Allocation Rate in the first few years is low and the rest goes to pay the high costs and agent commissions. The bonus just helps to bring the initial investment closer to the actual premium paid. |
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The Lock-In/Penalty |
The bonus encourages long-term commitment. |
The bonus comes with a cost: a high surrender charge. If you terminate the policy early (often within the first 10-15 years), the insurer will often claw back the value of the welcome bonus, resulting in you receiving far less than your total premiums paid. |
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Long-Term Value |
The bonus provides a better long-term return than investing directly. |
Over the long term, the accumulated effect of high annual fees (policy administration charges and fund management fees) can easily outweigh the one-time welcome bonus and any small loyalty bonuses, resulting in lower net returns compared to lower-cost investment alternatives. |
Conclusion: Keep your insurance and investments separate.
Keeping your insurance and investment separate gives you greater control and flexibility over how you wish to allocate your monies for investing and insurance purposes. It also avoids the restrictions of a lock-in period, where you could face penalties if you are unable to maintain premiums or wish to make an early surrender or terminate the policy.
For insurance protection: Get Term Life plans for pure protection purposes and use the remainder for investments. At FSMOne, we help you save more with our commission rebate program offering up to 45% commission rebates on eligible products. Reach out to us here to find out more.
For investments: With ILP marketed as a product for individuals to “dollar cost average” their investments without having to actively monitor their investments, you may achieve the same outcome with FSMOne’s regular savings plan (RSP) options.
- Offering 291 ETFs, 2058 Unit Trusts, and 10 Managed portfolios, build your portfolio effortlessly with RSP. Set automatic investments weekly, bi-weekly, or monthly and let your money work for you, with no need to time the market. FSMOne offers 0% sales charge to buy, sell, switch or RSP into unit trusts but may charge a quarterly platform fee. More information on RSPs can be found here.
Have a question on your insurance? Reach out to us for a complimentary consultation
From now till 31 December 2025, take charge of your insurance needs and reach out to us for a complimentary review. Receive expert guidance on your coverage and get a $88 FSMOne Cash Account Reward* when you successfully review your insurance with us. You may also get up to 45% commission rebates on eligible policies! Get covered confidently and get rewarded. Click here to get started.
*Terms and conditions apply. Read more here.
Read also,
- Our 2025 Review on Critical Illness (CI) coverage: Minimise your lifetime premium on your CI plan with this guide
- I have life and health insurance. Am I well covered?
- MediShield Life is not for private hospital bills. Here’s why.
- Your IncomeShield plan is changing in October 2025. This is what you should know.
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Available Products on FSMOne Insurance |
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Term Life, Whole Life, Critical Illness, Annuity, Health, Endowment, General Insurance (Personal and Commercial) from AIA, AIG, Allianz, China Taiping, Cigna, Chubb, Etiqa Insurance, FWD Insurance, Great Eastern, Henner, Income, Manulife, MSIG, Raffles Health Insurance, Singlife, Sompo, Tokio Marine, and QBE. *Please check with our team if the product you want is available on FSMOne Insurance |
Information obtained from:
https://www.mas.gov.sg/-/media/mas-media-library/news/media-releases/2023/basic-financial-planning-guide-2023.pdf
Information retrieved on 30 September
2025.
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