Which ILP provides the best returns?

The following was sent by an anonymous who would like to know which Investment link plan would provide/generate the best returns. He is puzzled by the various allocation rates offered by different insurers. What does the allocation rate mean? How does Units Trust differ? 

Allocation rate / Insurer	A	B	C	D
Year 1	30	30	15	55
Year 2	30	60	54	65
Year 3	55	90	102	75
Year 4	105	105	102	100
Year 5	105	105	102	100
Year 6	105	105	105	100
Year 7	105	105	105	100

The following forms part of my opinion. There is NO intention to make any recommendation of any ILP or Unit Trust fund(s).

My response is:

My assumptions follows:

(I could be wrong but I doubt any insurance agent can deliver performance because without having the appropriate license, they could only assist to recommend funds that meet your risk profiling, nothing more.

Without the appropriate license, they are not supposed to choose any funds for you. For e.g. if your risk profiling is ‘Moderate’ or ‘Balanced’, their recommendation is probably within the 50% equities and 50% bonds guidelines. They cannot recommend a narrowly focused country specific fund like China, India or Singapore with a 100% allocation in equities for a risk profile of ‘Balance’ or ‘Moderate’. This is NOT within MAS guidelines!

Some Independent Financial Advisers (IFA) has Market Strategists and Portfolio Manager to assist portfolio management. They provide investment talks/forums to educate clients to an informed decision. Otherwise, your investment performance will depend on lady luck.)

As the information you provided me was just the above allocation rate, I would not be able to provide my opinion on its feature and benefits. Hence, I’ll try to make assumptions and discuss from the (non) allocation rate point of view.

If your annual contribution is S$ 10,000, a 15% allocation rate means that S$ 1,500 is supposedly allocated for investment in Year 1. S$ 8,500 is deducted for Cost of distribution like commission, etc.

The allocation rate that is not allocated for Company A

·         is (100-30) for Year 1, (100-30) for Year 2 and (100-55) for Year 3.

·         That would be 70 plus 70 plus 45 giving a total of 185% not allocated.

·         At Year 4, you would have 5% additional units which would make the break even period to be approximately 37 years or Year 41

Similarly,

·         the break even period for Company B is approximately 22 years or Year 26

·         the break even period for Company C is approximately 25 years or Year 31

·         There will be no break even period for Company D.

The assumption is that if the unit price is unchanged, it would take Company A, B, C to break even in 41 years, 26 years and 31 years respectively.

While the bid offer spread varies with different insurers, the break even period would take much longer. The B/O spread reduces (in addition to) the allocation rate further.

The allocation rate for unit trust is 100%. The break even period is immediate (Bid offer spread is not taken into account)

Whichever/Whatever your intention to purchase an ILP plan is for risk management or for investment, please consider that any addition of riders (as a result of risk management for e.g. critical illness rider, term rider, waiver of premium, etc) will only exhaust your units because there will be deduction for the respective cost in terms of units before allocation rate. This will take the breakeven period very much longer.

We have not even discussed the plan generating yields! Am I correct? A growth in a Unit Trust fund will generate the same amount with the respective ILP plan.

As far as my knowledge permits, IMO, the most important feature of ILP plans is the waiver of premium on diagnosis of critical illness. In the unfortunate event of a diagnosis, the premiums are waived; you just sit back and collect your income/maturity/retirement benefits when the time is ripe!

I hope the above crystallize your queries/concern!