With so many better options today, investment-linked insurance plans just don't make sense to me
Mixing insurance with investments may look convenient, but the hidden costs and inflexibility make it a poor deal in the long run, finance blogger Dawn Cher says.
An investment-linked insurance policy is often pitched as a convenient way to invest, which is why many people assume that it is a passive investment tool, but this is a misconception, finance writer Dawn Cher said. (Illustration: CNA/Samuel Woo, iStock)
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When I first entered the working world in the early 2010s, one of the earliest conversations I had with a financial adviser was about investment-linked insurance plans (ILPs).
It sounded like a smart idea at the time – I could check two items off my adulting to-do list by getting life insurance protection while investing at the same time.
Think of ILP as a two-in-one deal: part insurance, part investment. Your money covers you and also goes into funds that are supposed to grow your wealth.
For many people who lack confidence or are afraid to invest on their own, they tend to count on their ILP to do the work for them, relying on the skills and competence of their financial adviser.
My experience was thus hardly unique. In Singapore, many people's first step into investing comes through ILPs sold by insurers, often by friends or family acting as advisers. These products, largely agent-driven, have surged since 2022, making up 43 per cent of new life insurance business in the first half of 2025.
At first, this may seem practical. However, when the ILP fails to perform well, people often end up regretting their decision, only realising then that their investment returns were not guaranteed.
Over the years, as I became more informed about how to invest, I also realised just how much my ILP was costing me.
INVESTMENT RETURNS NOT GUARANTEED
Most people know that they need to invest to beat inflation, but the problem is, few know how or take the time to learn.
An ILP is often positioned as a convenient and fuss-free way to invest. That is why many people make the mistake of assuming that it is a passive investment tool, but this is a misconception.
How well an ILP does depends on the funds you pick, which can go up or down with the market. And no matter what happens, it is the policyholder, not the insurer, who takes on all the investment risk.
Over the years, several readers have come to me complaining that they've been investing regularly through their ILP but have seen negative or muted returns.
A friend's mother diligently invested S$6,000 every year for the last decade, only to see negative returns until she finally terminated it in 2024 once her daughter found out.
She recovered just S$30,000 of the S$60,000 paid. She has since reinvested in a low-cost global exchange-traded fund (ETF) that charges less than 0.05 per cent fees every year.
Similarly, on online forum Reddit, a disgruntled Singaporean revealed that after 10 years, her ILP is still worth less than her total premiums. Such cases show why it is crucial to understand how ILPs work and why their costs and risks can outweigh the convenience they promise.
THE PROBLEM WITH HIGH FEES
Even if your ILP makes money, the fees will eat into your gains.
Insurers often bundle sub-funds into different portfolio options, but investing in them through an ILP means paying multiple layers of charges – you are paying fees to fund managers, insurers and commissioned agents.
In the early years, much of your premiums go towards sales commissions, administrative charges and other fees rather than your investments.
Even with "welcome bonuses", usually offered by insurers for the initial years to offset this, total fees often add up to 2 per cent or more of your investment each year.
Welcome bonuses may help offset fees in the first few years, but ILPs are meant to be held for decades, which means consumers need to ask whether they are truly willing to pay these fees over decades.
In contrast, if you go through a brokerage, you could buy some of the same funds directly, or even a lower-cost ETF that is traded on the stock exchange and tracks a similar benchmark such as the Straits Times Index (STI). The STI is Singapore's key stock market benchmark, made up of 30 of the country's biggest listed companies including banks such as DBS, OCBC and telecommunications firm Singtel.
Fees for such ETFs are much lower, at just 0.26 to 0.30 per cent a year.
Today, there are far better alternatives than when ILPs first became popular in the 1990s and early 2000s, with some plans now allowing you to start investing with as little as S$100 a month.
You can also buy ready-made funds, such as unit trusts, or even small portions of individual shares, through most brokerages or robo-advisers without needing a big sum of money.
With these options, ILPs often appear less cost-effective for those willing to learn and take a hands-on approach.
WHEN THINGS DON'T GO AS PLANNED
When we are young, it is easy to commit to an ILP and assume we'll be able to maintain the same monthly contributions forever.
But life doesn't always go as planned. A job loss or a new baby can quickly turn those premiums into a heavy burden.
While some insurers allow "premium holidays" or "premium passes", they often come with conditions, fees and limits. Stop paying and your policy may lapse or eat into whatever cash value you have built up.
On top of that, policyholders can choose only from a limited set of funds offered by the insurer, and most ILPs require a commitment of at least 10 years, with stiff penalties for exiting early.
When this happens, the surrender value may be less than the total premiums paid.
In contrast, investing through a brokerage account or robo-adviser gives me the freedom to stop or restart my investments anytime with no penalties or hidden charges.
A SMALL SILVER LINING
To be fair, ILPs do have a niche appeal.
For example, they offer retail investors a rare opportunity to put their money into select funds otherwise meant for accredited investors only, and at a lower capital outlay. This could appeal to someone specifically seeking such exposure.
But for the average consumer, this is rarely the case. Many policyholders don't fully understand how ILPs work, or were even mis-sold the product.
Even if disputes are resolved, they may not get all their premiums back, and the opportunity cost of not having invested earlier in cheaper options such as ETFs or robo-advisers can be painful.
Ultimately, the investment risk lies with the policyholder.
ILPs might suit people who are incapable of investing or want a forced savings mechanism, or who prefer a hands-off approach to investing and don't mind paying extra fees for it.
But for me, the lack of flexibility and significantly higher costs outweigh the benefits.
In a world where better, cheaper and simpler tools exist, I'd rather keep my insurance and investments separate and invest by myself.
After all, financial freedom is about making informed decisions – not just buying the first product that gets pitched to you.
Dawn Cher, also known as SG Budget Babe, is the author of Take Back Control of Your Money. She has been running a popular blog on personal finance for the last 10 years.
