What ILPs Get Wrong About Investing (And What I Do Instead)

As the old joke in Singapore goes, if you’ve ever gotten a random phone call/WhatsApp message from your schoolmate–that you haven’t spoken to you in years–asking you to meet up for a coffee, chances are they’re working as an insurance agent and trying to sell you a plan.

But in all seriousness, everyone does need insurance, yet how that insurance is sold to us as individuals can cause a lot of confusion, and rightly so. That’s mainly because many insurance policies (with desired coverage) can be sold via what’s called an investment-linked policy (ILP).

The hawking of ILPs in Singapore to individuals has sparked many complaints about alleged “misselling” of these policies. But what’s behind ILPs and why are so many people disgruntled with them? I’ll give you my own (unfiltered) thoughts on why this is the case.

 

Why ILPs may not be the best of both worlds

One of the main selling points when ILPs are marketed to you is that they give you the “best of both worlds” of investment and insurance.While that sounds ideal, it’s important to understand how these two components interact in practice.

In my experience working in the finance and investment industry, the general advice among professionals is to “keep your investments and insurance separate”. 

Of course, ILPs may still suit certain individuals depending on their needs and preferences. But for those prioritising flexibility and performance, a separate approach tends to offer clearer advantages.

That’s mainly because investing your money into a low-cost, globally diversified exchange-traded fund (ETF) that tracks global stocks will compound your wealth at a much faster rate (after expenses) than any fund within an ILP could deliver. 

On the insurance side, a simple term life policy and basic health coverage usually offer sufficient protection without unnecessary complexity. This clear separation of goals—investing for growth, insuring for risk—keeps things flexible and cost-effective.

ILPs, by comparison, tend to bundle these elements in a more complex, less transparent way that may not suit everyone’s needs.

Fees, fees, and more fees

If anyone has ever signed up for an ILP, they’d soon realise that there are a plethora of fees associated with them.

Now, fees are generally not great, but when it comes to our investment portfolio, fees can significantly reduce the overall returns we can expect over time.

And with ILPs, fees are literally everywhere. There are fees/charges such as a policy administration fee, fund management fees, surrender charges, and sales charges. Now these aren’t insignificant.

Indeed, something like a fund management fee can cost you up to 2% per annum (p.a.) of your invested amount. That can increase and compound as you pay more fees, the more premiums you start to put into an ILP.

Meanwhile, sales charges are just a plain rip-off in my view—typically set at 5% via the bid-offer spread whereby the insurer sells you units of the investment at the offer price and then purchases units from you at the bid price (which is lower).

As you can see below, taking the AIA Elite Adventurous Fund (as part of the AIA Pro Achiever ILP)  as an example, the most aggressive investment option only delivered 5-year annualised returns of 9.7%. That compares to a 5-year annualised return from the iShares Core MSCI World UCITS ETF of 14.03%, which means it outperformed by nearly a full 5 percentage points each year.

Part of that performance difference comes down to cost. The AIA Elite Adventurous Fund charges 1.45% per annum (p.a.) in fees. In contrast, the iShares Core MSCI World UCITS ETF has an annual expense ratio of just 0.20%—about one-seventh the cost.

AIA Elite Adventurous Fund: AIA Pro Achiever ILP

Source: AIA as of 30 April 2025

iShares Core MSCI World UCITS ETF

Source: iShares Core MSCI World UCITS ETF as of 30 April 2025

This spread (or sales charge) is meant to pay for distribution costs, marketing, and other general administration expenses…although it’s not exactly clear as to how these costs benefit you or your policy. 

The fees build up and the policy contract that you enter into has so many “gotchas” that even Harry Houdini couldn’t wriggle out of a standard ILP.

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ALSO READ: Here’s Why Singaporeans Should Buy UCITS ETFs

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Inflexibility for your finances

Whenever I speak to someone who has purchased an ILP, one of the most common frustrations is the lack of flexibility.

Many policies lock you into monthly premium payments for 10 to 20 years, making it difficult to exit early. And if you do choose to surrender the policy, steep charges may apply—effectively penalising you for stepping away.

This structure often pushes people to continue making payments, even when the policy may no longer serve their best interests.

Beyond that, ILP premium payments impose a burdensome load on individuals. In some cases, premium payments can account for up to 30% of a person’s monthly gross income. If someone loses their job or suddenly stops making an income (for whatever reason), there is little flexibility that allows them to lower those premiums or pause payments on an ILP.

However, if you’re separately investing monthly, you can lower (or even fully stop) your monthly investing contributions–if you run into financial trouble–with no penalties attached. It seems like a “no-brainer” to me when it comes to the benefits of keeping insurance and investments separate. 

 

What I do instead

By going out and doing minimal research on ETFs, we can easily identify a low-cost, global stocks ETF that we can invest in monthly. Then, on the insurance side, we should simply go out and buy term life insurance or health insurance that covers what we feel we need.

Doing this will save us significant amounts of money over the long term and will also allow us to avoid handing over a boatload of commissions to agents. 

Since it’s our money we’re investing and buying insurance with, we are entitled to keep as much of it as we can. Indeed, that should be one of our primary goals when we invest; identifying the best low-cost option to grow our wealth.

 

Think hard about your investing and insurance journey

I’ve always told anyone who would listen, “Isn’t it strange that we invest through an insurance agent, but we don’t buy insurance through the salespeople at an investment management firm?”.

Therein lies the big issue. We should keep our investments and our insurance separate. Seek help on insurance from an agent if you must when buying insurance, and then go out and invest yourself by utilising low-cost exchange-traded funds (ETFs). 

These will likely outperform almost any actively managed fund over a 10 to 20-year period, and they will almost certainly do better thanILPs, given the spaghetti soup of fees involved with the latter. 

Keeping it simple when we invest and buy insurance is a great way to not only grow our wealth but also ensure we don’t give away too much of it in ILP fees.

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About the author

Tim Phillips has spent over 15 years in the finance industry as an investment communications specialist with the likes of Schroders, The Motley Fool, and CGS International. He’s passionate about helping people take control of their finances by building wealth through long-term investing and thinking more coherently on all things “money”. He loves breaking down complex financial topics into content that’s informative and, most importantly, engaging.