As of 30th June 2018, the 3-year performance of investment-linked policies (ILPs) ranged from -3.91% to 20.78%. While you might be tempted to focus on the upper range of the indicative performance of ILPs, it is noteworthy that the range is skewed by outperforming sub-funds. Typically, 95% of ILP sub-funds’ investment performance is between 1% and 6%. That still isn’t too bad, or is it?
Well, if you add in the expense ratio and sales charge that you need to pay when investing in ILPs, you can expect the investment return of ILPs to be halved. Even with the latest regulatory change to reduce sales charge on ILPs for CPF members, the cons of buying an ILP still outweigh the pros.
Are there ways where you can stay protected while, at the same time, beat the investment returns of an ILP? We found 4 ways to help you do just that.
If you aren’t too familiar with ILP, check out our Insurance 101: Your Beginner’s Guide To Investment-Linked Plans (ILPs).
1. Unit trust + term insurance
If you break down the components of an ILP, you will realize that it is made up of two components: Unit trust and term insurance. Term insurance provides the policyholder with a death benefit while the sub-funds that you choose are invested in unit trust-like investments. Thus, a simple way to recreate an ILP is to buy term insurance and invest the rest of your money in unit trusts.
Advantages of unit trust + term insurance
The main advantage of unit trust + term insurance versus ILP is the absence of charges and fees from your insurer. Since your insurer was acting as your middleman to help you collect premiums and manage your premium, charges and fees are levied on you.
Another advantage of creating your own version of ILP using this method is that you get a wider range of unit trusts to choose from. If you buy an ILP from any insurer, the number and types of sub-funds are subjected to the insurer’s choice. Some insurers might have 10 sub-funds while others might have 30 sub-funds. The choices of sub-funds from an ILP is typically limited. By creating your own ILP using the unit trust + term insurance method, you can choose from the whole universe of unit trusts. You can even invest in funds that are domiciled overseas.
2. Regular savings plan + term insurance
With a unit trust + term insurance method, it requires effort and discipline to consistently invest in unit trusts. What if you previously treated an ILP like a forced savings tool to instil a habit of saving in yourself?
One way you can replicate the forced savings mechanics of an ILP is through the regular savings plan (RSP) + term insurance method. Instead of picking which unit trusts to invest in, you can instead invest in the market index like Straits Times Index (STI). This can be done by setting up an RSP. With an RSP, a fixed dollar amount gets deducted from your savings to go into investments every month. This recreates the forced savings element that an ILP offers but at a fraction of the cost.
Furthermore, this method also helps you to save on the cost associated with investing in unit trusts. In particular, the bid-ask spread cost of unit trusts can be avoided as RSP generally invests in low-cost exchange-traded funds (ETFs).
3. Do-your-own investing + term insurance
For those who are financially savvy, unit trust and RSP might not be suitable for you. This is especially if you want more flexibility in deciding what goes into your investment portfolio. If you want more control over your portfolio components, the DIY investing + term insurance method is for you. You can decide how you want to invest the rest of your capital after deducting the premium of your term insurance.
With this method, you can also choose to time the market, especially if you think that the market is currently overvalued. At times when the market is undervalued, you can double down on your investments to take advantage of overcorrection in the market.
4. The real hack: OCBC 360 + OCBC robo advisor + insurance with OCBC
Now, here comes the ultimate hack that we think anyone who is considering an alternative for ILP should look at. This hack involves OCBC 360, OCBC’s investment plans and OCBC insurance.
*Disclaimer: This is not an advertorial for OCBC products
OCBC MaxTerm Value
Since OCBC also offers term insurance, you can get your protection element from OCBC’s MaxTerm Value plan. This is similar to other term insurance plans in the market.
OCBC RoboInvest, Blue Chip Investment Plan
For the investment element, you can either choose to invest through OCBC’s Blue Chip Investment Plan (BCIP) or OCBC’s new robo advisory called RoboInvest. Going with the option of OCBC’s BCIP is similar to replicating method 2 that is mentioned above. So, we will not delve too much into detail. Instead, we will focus on the OCBC robo advisory option.
OCBC’s RoboInvest offers a selection of thematic portfolios for you to choose from that best matches your preference. The 28 baskets of portfolios, together with OCBC’s proprietary algorithm, are specially curated to help you invest like a pro. It also takes into account your personal risk preference to design a portfolio that will suit your needs. OCBC’s RoboInvest takes into account different elements to help you optimise your returns without having to monitor market trends.
OCBC 360 account
This hack wouldn’t work without an accompanying OCBC 360 account. By getting OCBC insurance and investing with OCBC RoboInvest, you will qualify for the wealth segment of OCBC 360. This allows you to earn an additional interest rate of up to 1.2%. The 1.2% is a guaranteed interest that you can earn on your savings account. This is on top of the investment return you will earn from OCBC RoboInvest. Not to forget, the 1.2% interest is earned on your savings, which might be a larger base than your investment capital.
In addition, you can enhance the interest rate earned on your OCBC 360 account by paying for your insurance through an OCBC credit card. At the same time, you get to earn some cashback from your credit card spending.
Check out some of the OCBC credit cards that you can link to your OCBC 360 account to earn more rewards and rebates
- OCBC 365 Credit Card Review: High Cashback or Cashback Everyday?
- OCBC VOYAGE Card Review: A Miles Card in Its Own League
- OCBC Plus! Visa Card Review: 7% Rebate At FairPrice and more
- OCBC Cashflo Credit Card Review: Free Auto Instalments + 1% Rebates
- OCBC Robinsons Card Review: 5% Rebate at Robinsons, Zara and More!
- OCBC Titanium Rewards Card Review: The Best Miles Card For Shopping
Not keen on banking with OCBC? There are many other high interest savings accounts in Singapore. You could consider them to work out which would provide the highest return for you.