Why ILPs still undermine consumer wealth in Singapore

In Singapore, there’s a familiar punchline: when an old classmate messages you out of the blue to "catch up over coffee," odds are they're an insurance agent. Behind the laugh lies a quiet discomfort—many still feel that insurance here is sold, not thoughtfully recommended.

At the heart of this discomfort are investment-linked policies (ILPs), products that package insurance and market exposure into one. The concept is tidy on paper: one premium buys you both protection and potential gains. But peel back the glossy brochure, and what many encounter instead are hefty costs, rigid conditions, and disappointing outcomes.

Yet these hybrid products persist—popular not because they work best for consumers, but because they pay handsomely to be sold. The appeal is obvious for agents; for buyers, the true cost often becomes clear only after years of commitment.

Marketing pitches for ILPs love to tout synergy: “Why pay separately when one plan does it all?” It sounds like efficiency, but it hides a deeper contradiction. Insurance exists to guard against the unknown. Investment thrives on embracing it. Blending the two into one vehicle can dull both purposes. What results is often neither robust protection nor strong growth. Policies may offer limited coverage, and the investments inside them tend to lag behind what you'd earn through direct, low-cost alternatives.

Seasoned financial planners usually give the same refrain: separate your insurance from your investments. Term life for protection; ETFs for returns. It’s not glamorous advice, but it’s consistent—and cost-effective. Unlike ILPs, this separation gives you flexibility, fee transparency, and performance you can actually measure. With ILPs, that clarity fades behind layers of fund options, fine print, and opaque fee structures that few laypeople are equipped to decode.

ILPs don’t just blur the lines between insurance and investing—they do so while layering on charges that quietly erode your money. The pricing is rarely intuitive and often buried in the middle of long-form brochures or terms and conditions.

A typical ILP might include:

• A policy admin fee deducted monthly
• Fund management charges—often around 1.5–2% per year
• Sales charges hidden through bid-offer spreads (you buy at the higher price, sell at the lower)
• Surrender fees that punish early exits

Consider the numbers. The AIA Elite Adventurous Fund—an aggressive ILP option—posted a 9.7% annualised return over five years. Not bad, until you compare it to something like the iShares Core MSCI World UCITS ETF, which returned 14.03% over the same stretch. What’s dragging down the ILP? Fees. The AIA fund charges 1.45% annually. The ETF’s cost? Just 0.20%.

It may seem like a few percentage points. But across a decade or more, that gap compounds—and the investor ends up with significantly less wealth than they might have otherwise built. Even worse, ILPs are unforgiving when life changes. Miss a few premiums, or try to cash out early, and you're likely to be penalized heavily. Flexibility is scarce, even when financial realities shift.

So why do ILPs still sell so well? Follow the money. The commission structure behind them is generous—especially for plans with long-term premiums. Agents often receive a large chunk of their earnings upfront, meaning the incentive to push ILPs over simpler, cheaper products is baked into the business model. To be fair, not every agent is motivated purely by commission. Many aim to help clients and do act in good faith. But when compensation is tied to product complexity and contract duration, the system nudges even well-meaning advisors toward selling what pays most.

Meanwhile, many consumers are left under-informed. They don’t always know how to evaluate total fees, benchmark fund performance, or interpret long-term return projections. That knowledge gap leaves room for mis-selling—sometimes subtle, sometimes unintentional, but still costly.

Things may finally be shifting. As financial awareness spreads, especially among millennials and Gen Z, traditional ILPs are starting to lose their shine. Robo-advisors, passive investing apps, and direct insurance platforms are giving Singaporeans more control—and fewer reasons to accept high-cost, bundled products.

The modern approach favors simplicity: buy term life coverage, invest the rest in a diversified, low-fee global ETF. It’s not only cheaper, but also more flexible. You control the investment horizon, switch funds easily, and can adjust your insurance coverage separately based on life stage. Institutions are also responding to rising demand for transparency. MAS has taken steps to standardize fee disclosures and simplify product summaries. But change is slow. Many ILP documents remain jargon-heavy, and crucial cost details still hide in footnotes and side tables.

The ILP landscape in Singapore may not collapse anytime soon, but it is clearly under pressure. Three shifts could define its future:

1. Regulatory tightening
   MAS could further restrict upfront commissions or mandate clearer illustrations of long-term net returns after fees. Transparency might become a compliance requirement, not a marketing choice.
2. Digital competition
   With access to low-cost, unbundled financial tools growing fast, the traditional ILP pitch is starting to sound dated—especially to younger consumers who prefer autonomy.
3. Vocal pushback
   Social media threads, consumer forums, and even letters to the press show growing dissatisfaction. Many ILP holders now feel misled, and they’re no longer keeping quiet about it.

Still, the model may survive in niches—among buyers who value convenience or lack confidence managing their own portfolios. But its mass-market appeal is waning as people realize that simplicity often outperforms complexity.

ILPs are a product of convenience—for buyers, yes, but far more so for sellers. They promise ease but deliver opacity, rewarding those who sell them handsomely while under-delivering for the people who buy in. In a system that prioritizes commissions over outcomes, the average investor is left holding a quietly shrinking bag.

We believe it's time to demand better. Insurance should protect. Investing should grow wealth. And financial products should be built around consumer needs—not distributor margins. Until the system catches up, the wisest path for most remains clear: separate your coverage from your capital, keep fees low, and keep it simple.