ILPs in Singapore, reconsidered: the behavioural case most people miss

Contents

1. What actually changed
2. The number everyone watches, and the one that decides the outcome
3. What the behaviour gap costs
4. What an ILP does to behaviour, mechanically
5. The honest accounting
6. Where the benefit is real, and where it is illusory
7. Who it fits, and who it doesn't
8. What to check before signing
9. Frequently asked questions

Ask about investment-linked policies in Singapore and you will get a fight rather than an answer. One side calls them a commission product dressed as investing. The other defends them as disciplined wealth building. Both are usually describing plans designed a decade or more ago.

Meanwhile the product has moved, and the more interesting question has gone unasked. This piece tries to ask it properly, without arguing for a conclusion.

What actually changed

The ILP that generated most of the reputation was protection-focused: a substantial share of early premiums went to distribution costs rather than into the market, insurance cover was significant, and mortality charges cancelled a rising number of units every year as the policyholder aged. Over a long horizon those charges could consume a meaningful share of the account.

The plans being sold today are mostly a different animal — wealth-accumulation ILPs, where the insurance element is deliberately minimal and the wrapper exists to hold investments. Common features now include:

• No premium allocation charge in the early years on a number of plans, meaning the full premium is invested from the start rather than partly absorbed.
• Welcome, booster or start-up bonuses — additional units credited over the first few years, on some plans reaching a substantial percentage of early premiums.
• Charge-free partial withdrawals after a set period, for instance a percentage of policy value annually from the fifth anniversary, on some plans with no withdrawal charge at all.
• Free fund switching between sub-funds, and access to institutional share classes an individual investor generally cannot buy directly.
• Minimal death benefit — often just the account value plus a small margin — which keeps mortality charges from becoming the drag they were in older designs.

None of this makes the wrapper free. Charges still exist — policy and administration fees, the expense ratios of the underlying sub-funds, and surrender charges in the early years on regular-premium plans. But the shape of the cost has changed enough that a criticism written against the old design does not automatically land on the new one.

The number everyone watches, and the one that decides the outcome

Here is the pattern I see in almost every conversation about these products, and it is close to universal among Singaporean investors: the entire discussion is about the illustrated return and the maturity value.

What will it be worth in twenty years? What return does the projection assume? How does that compare to an index fund?

These are reasonable questions. They are also, on their own, the wrong frame — because the illustrated return is a property of the product, and what you end up with is a property of the product and your behaviour combined. The second variable is routinely assumed to be perfect, and it almost never is.

The return you compare is the one the fund earns. The return you receive is the one you stayed invested for.

Nobody plans to sell at the bottom. Nobody budgets for the month they stop the transfer because the account is down 30% and the news is bad. Yet those decisions, not the expense ratio, are what most often separate a good outcome from a mediocre one.

What the behaviour gap costs

This is measurable, and it has been measured repeatedly.

Morningstar's annual Mind the Gap study compares a fund's stated return against the return actually earned by the average dollar invested in it — which accounts for when investors put money in and took it out. For the ten years to December 2024, the average dollar in US mutual funds and ETFs earned 7.0% annualised, while the funds themselves returned 8.2%.

That gap of roughly 122 basis points a year amounts to about 15% of total returns given up. The cause is not fees — fees are already inside both numbers. It is timing: investors as a group buy most heavily near tops and sell most heavily near bottoms.

Two things make this finding hard to dismiss:

• It persists. Morningstar has found a gap in every ten-year window it has measured, across market conditions.
• It is larger than the cost differences people argue about. Debates over ILP charges frequently turn on a difference smaller than 122 basis points a year — while the behavioural variable, which is bigger, is assumed away entirely on both sides.

Morningstar's own research also found that investors in many categories would have fared significantly better contributing regular monthly amounts than making lump-sum decisions — precisely because it removes the timing judgement.

What an ILP does to behaviour, mechanically

Set aside whether you like the product. Structurally, an ILP changes four things about how a person invests:

1. It automates contribution. A standing premium debit continues through good months and bad. That is dollar-cost averaging enforced by default rather than by willpower, and it buys more units precisely when prices have fallen.
2. It adds friction to exit. Surrender charges and paperwork mean panic-selling is not a tap on a phone screen. Friction is usually a cost; during a drawdown it can be a benefit.
3. It rewards persistency. Bonus units typically vest only if premiums continue for a minimum period. That is a deliberate incentive to keep going through the years people are most likely to stop.
4. It removes the recurring decision. No monthly judgement about whether now is a good entry point — the judgement that the behaviour gap is largely made of.

Whether these are worth paying for is a genuinely open question. But notice that all four are behavioural, and none of them appear anywhere in a returns comparison. A spreadsheet putting ILP net return against ETF net return has silently assumed the investor behaves identically in both — which is the one assumption the evidence says is false.

The honest accounting

Read the last row as the summary. Both columns can produce a good result. They rely on different things to get there, and the honest question is which of those two things you can count on in your own case.

Where the benefit is real, and where it is illusory

The behavioural argument is often made lazily, so it is worth being precise about when it holds.

It is real when:

• You have a track record of starting and stopping — an investment account funded enthusiastically for eight months and then left alone.
• You have sold during a market fall before, and remember how reasonable it felt at the time.
• Money that is accessible tends to get spent on something else.
• You will genuinely hold the plan for its full intended term.

It is illusory when:

• You surrender in year four. The friction that was supposed to protect you instead becomes the loss — you pay the wrapper's cost and receive none of its benefit. This is the single most common way the argument fails in practice.
• You already invest consistently. Then you are buying discipline you have, and the cost is pure drag.
• The plan is treated as a reason not to think — the structure keeps contributions going, but nobody reviews whether the sub-funds are still appropriate.
• It is sold as a substitute for protection. It is not. Cover should be sized and bought separately; see what to buy and in what order.

Who it fits, and who it doesn't

Worth considering if: you have a long horizon of fifteen to twenty years or more, stable income that comfortably supports the premium, an honest self-assessment that structure helps you, and you have read the charge disclosures rather than the brochure.

Probably not if: your income is irregular or your emergency fund is thin, you may need the money within a decade, you already invest steadily on your own, or your protection and hospitalisation cover are not yet adequate — those come first regardless of what any accumulation product offers.

What to check before signing

All of this is disclosed. None of it requires a confrontation to obtain.

1. The effect of deductions (reduction in yield) at year 10 and year 20, at the lower projection rate.
2. The surrender value schedule for each of the first ten years, against total premiums paid.
3. The exact bonus conditions — how long premiums must continue, and what is clawed back if you reduce or stop.
4. The expense ratios of the specific sub-funds you will hold, not the range available.
5. Whether fund switching is free, and how many switches a year.
6. What happens on a premium holiday or a reduction — and whether cover or bonuses are affected.
7. The withdrawal terms — when charge-free withdrawals begin and how much.
8. What the same monthly amount would look like in a direct portfolio over the same period, so you can see what the structure costs you.

Question eight matters most. If you can see the cost of the wrapper clearly and still judge it worth paying for what it does to your behaviour, that is an informed decision. If you cannot see the cost, no decision has really been made.

Frequently asked questions