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Financial: The useless ILP, and how to go about terminating it

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Financial: The useless ILP, and how to go about terminating it

Postby flyawayhome » Wed, 11 Oct 2017 5:01 pm

Have you previously bought for yourself or your loved ones investment-linked policies (ILPs)? Well, on the surface such instruments put forth a rather enticing proposition: secure substantial insurance coverage, at the same time have funds funneled into unit trusts to grow your nest egg. But the somewhat fuzzy manner in which things actually "work" behind the scenes typically means you the client will in all likelihood be shortchanged despite your best efforts to be discerning. It shouldn't come as a surprise; after all, actuarial science is a notoriously sneaky slimeball exploited to benefit an insurer's bottom line first and foremost.

Let's discuss a real life case (yes it happened!) in which an individual in his thirties who until late September 2017 has been contributing a not quite insignificant monthly premium of $215.66 towards a $200,000 sum assured ILP offered by a well-known international insurer. Having done so for the past eight years plus since June 2009 (which therefore spans a duration of 12 × 8 + 3 = 99 months), he would have forked out a total of $21350.34. The bloke finally came to his senses and decided to cut his losses after much deliberation, so he surrendered his policy and received a cheque for an amount slightly less than 16k. How much did he throw down the drain altogether? A whopping five thousand dollars plus change! Utterly shocked? You should be. In a nutshell, here are the main reasons why the purchaser of an ILP will almost surely be at the losing end of the deal:

Your premiums are used to pay for a lot of crap other than for actual investment purposes

In the initial years, chunks from your premiums are taken to cover distribution costs, with the remaining funds (obviously no longer a 100%) being used to actually invest in unit trusts sans typical 5% sales charges. And then there are insurance charges incurred alongside policy fees which are deducted by selling away units on a monthly or annual basis. As one ages, insurance charges soar, not in a linear fashion mind you, but in an exponential one, which means the scenario where the units held in your policy end up being completely sold away just to account for these costs can arise, and you may even have to fork out extra monies to top up for the outstanding shortfall. In a nutshell, you could become a very unhappy holder of a policy with zero cash value, and still have to burn cash for continued insurance coverage in your twilight years.

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Re: Financial: The useless ILP, and how to go about terminating it

Postby sundaymorningstaple » Thu, 12 Oct 2017 10:08 am



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