Regular Premium Investment-Linked Products (ILPs): Costs
(The Regular-Savings feature doesn't come cheap)
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Regular Premium Investment-Linked Products (ILPs): Costs
(The Regular-Savings feature doesn't come cheap)
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Rank |
Insurance Company (name of reg. premium plan) |
Dist cost #1: Benefit Illustration (months needed to pay dist costs) |
Dist cost #2: Bid-Offer spread (% of single premium) |
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1 |
(Insure and Invest separately) |
0 months |
2 to 3 %
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2 |
NTUC Income (Ideal Plan) |
7 months
|
3.0 % |
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3 |
HSBC (Savings Manager) |
11 months
|
3.0 % |
|
3 |
OAC (MaxLink, ML12) |
11 months
|
3.0 % |
|
4 |
Asia Life (Flexi-Builder) |
15 months
|
3.0 % |
|
4 |
Prudential (PruLink Assurance) |
16 months
|
3.0 % |
|
5 |
Aviva (Gold Series) |
18 months
|
3.0 % |
|
5 |
ManuLife (Wealth Builder) |
19 months
|
3.0 % |
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5 |
AIA (Achiever) |
19 months
|
3.0 % |
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5 |
AXA (Flexi-Plan) |
19 months
|
3.0 % |
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5 |
GreatEastern Life (GreatLink, SupremeLife) |
19 months
|
3.0 % |
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Ave. Distribution Costs (See note 2) |
Average for distribution cost #1 (months needed to pay dist costs) |
Average for distribution cost #2 (% of single premium) |
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Regular-premium ILPs |
15 months |
3.0 % |
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Unit Trusts and RSP-ILPs |
0 months |
3.0 % |
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Important Information (1) Regular-premium ILPs permit regular savings. But the regular-savings feature doesn't come cheap. Costs average one and one-quarter year's premiums (15 months). In comparison, unit trusts and recurring single-premium ILPs (RSP-ILP) also offer regular savings plans -- but they do not impose this cost. By buying them, you save 15 months of premiums. (2) Regular-premium ILPs have two sets of costs. Unfortunately, both are called "distribution costs". (i) The first is shown in the column labeled: "Dist. cost 1 from Benefit Illustration". It shows "the months needed to pay dist costs" and is calculated as the distribution cost divided by the $200 monthly premium. Among the 10 largest life insurers here, it averages 15 months. (ii) The second column is labeled: "Dist. cost 2 from Bid-Offer spread". Among the same 10 life insurers, it averages 3.0 per cent of each purchase. (iii) The first distribution cost is a fixed cost. The second is a variable cost and depends on how long the policy is held. (Because they have different denominators, the costs are not additive and therefore they are shown in separate columns.) (3) Costs of regular-premium ILPs are understated and should include (i) policy fees which average $60 per year, which is $900 over the assumed holding period of 15 years. (ii) A second, more important, understatement is the bid-offer spread which is 5 per cent of the investment. It adds another 75 per cent of yearly premiums to the distribution costs over a 15-year holding period. (NTUC Income charges 3.5 per cent which adds 52.5 per cent to the distribution costs.) (4) In dollar terms, the average cost of the regular-premium ILP in year 15 is four times more costly. It costs $15,000 vs. $3,500 for a unit trust or RSP-ILP. (This calculation assumes a 30-year old, non-smoking male paying $200 in monthly premiums and earning a 9 per cent return over a 15-year holding period.) (5) Aviva's bid-offer spread is shown as 5 per cent in the table, which is its cumulative charge in year 6. In year 1, the charge is 3.25 per cent and by year 15, it rises to 11 per cent. For other insurers, the bid-offer spread is a one-time charge of 5 or 3.5 per cent of each investment. (6) Do regular-premium ILPs offer benefits, not found in unit trusts and RSP-ILPs, to justify their high distribution costs? For an analysis of this important point, please click here. |
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