You will be able to name the ILP charges that a unit trust does not have.
Get the product summary of an investment-linked policy (ILP) you hold or have been offered, and find the page of charges. Write down each charge, its rate and when it applies.
You are making this list because an ILP carries charges you will not find in a unit trust, and several of them shift from one policy year to the next. When they are all on one sheet, you can see what the policy would really cost you.
Wei Ling had completed modules 1 and 2, so unit trust documents were familiar ground for her. A friend of hers works as an adviser, and she asked them for the product summary of an ILP they had talked about. The PDF came through that night. She was looking for a sales charge and a management fee. The page she found listed charges under names she did not recognise, and some of the rates were different in each year.
When you buy a unit trust, a sales charge comes off each purchase (Lesson 2.1, "One-off charges: buying, switching and selling"). Many ILPs work differently. They set a premium allocation rate, meaning the percentage of every premium that goes into buying units. The insurer keeps whatever is left over, and most of it covers distribution costs, including the adviser's commission.
Suppose you pay S$3,600 a year in premiums and the policy allocates 20% in year one, 50% in year two and 100% from year three onward. Your first year's units are bought with S$720, which is 20% of S$3,600. In the second year, 50% of S$3,600 = S$1,800 goes into units. From the third year the full S$3,600 is used. After three years you have put in S$10,800, and S$6,120 of it has bought units.
This example follows one allocation design, where the rate is low in the early years and rises later. Other policies allocate 100% or more from day one and take their costs back later through other charges. You can only find out which design a policy uses by reading its allocation table. Each real product summary prints its own figures, and they vary widely between policies.
After units are bought, more than one charge can apply at once. Names vary between policies, and a given policy may not have every one of these:
Policy fee or administration charge, often a fixed sum each month or a percentage, collected by cancelling units. Insurance charge, or cost of insurance, which pays for your cover and goes up as you get older (Lesson 5.1, "An ILP is insurance and funds in one policy"). A charge on the account value, which some policies take only in the early years and others take for as long as the policy runs. Rider charges, for riders, which are extra cover you add to the policy. Sub-fund management fees, which come out of sub-fund prices in the same way a unit trust's management fee comes out of its NAV (Lesson 2.2, "Yearly charges: management fee, expense ratio and trailer fee"). Switching charges on sub-fund switches once any free switches are used up.
A unit trust has its own version of the last two: a management fee, and possibly a switching charge. The policy fee, the insurance charge, the allocation rate and the account value charge are the four that belong only to the policy. Put a mark beside each of them on your list.
Ending an ILP early usually means paying a surrender charge, which is deducted from the value paid out to you. Many policies set it highest in the first years and reduce it to zero after a fixed period. If you surrender in year three, for instance, you could get back far less than your account value. If the policy also starts with a low allocation rate, what you get back in the early years can be well below what you have paid in premiums.
Many policyholders stop sooner than they intended, after a new job, a baby or buying a home. You can sell a unit trust on any dealing day and pay a redemption charge at most. Getting out of an ILP in its first years can cost a great deal more. Write the surrender charge on your list, along with how it falls year by year.
Some policies credit bonus units, which may be called loyalty bonuses or welcome bonuses. These are extra units added at set points, such as after a certain number of years, or worked out as a percentage of premiums. They can look generous in an illustration, so check what earns each bonus and what loses it. Typical conditions are that you pay every premium on time, take no premium holiday, make no partial withdrawals and hold the policy until a stated year. If you surrender early, the bonus may be clawed back. In some policies the bonus partly returns charges deducted in earlier years. Count it as part of the policy's cost and put it on the list with the charges.
Wei Ling went back to the PDF and wrote out each charge in the product summary, with its rate and when it applied. She marked every charge a unit trust would not have. For the bonus, she recorded what earns it, what loses it and whether early surrender claws it back. Her list for the example policy came to eight lines, and five of them were charges she would never come across in a unit trust.
Do the same with your policy. Note every charge with its rate and when it applies, including the allocation rate and any changes by year. Check the allocation table to see whether the rate starts low and rises or begins at 100% or more. Mark the charges a unit trust would not have. Add the surrender charge and how it changes over time, then any bonus, with how it is earned, how it is lost and whether it is clawed back on early surrender. You will make the same list in the activity below, from a sample ILP product summary.
Take a sample ILP product summary and list every charge in it. Mark the ones a unit trust would not have.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).