I keep on getting queries from clients and potential clients that they want to terminate their 101 ILPs. This after they realized that they found it to be not suitable. What are 101 ILPs? 101 ILPs are investment wrapped under an insurance contract which provides very little insurance coverage. Typically, the death benefit is 101% of the investment market value. Thus, financial practitioners labelled it as ‘101’.
Examples of 101 ILPs are:
- Pruselect Vantage
- Zurich Life Vista
- Friends Provident Global Wealth Advance
- AXA Life Pulsar
The most common reasons why people found it not suitable after they bought it are:
- High commitment required. Typically, these 101 ILPs are sold with very large premium.
- Due to other priorities in life (e.g. marriage, the need to get a mortgage loan, children’s support etc), they found that they have insufficient money to continue with the 101 ILPs.
- Super duper high cost embedded into the ILPs.
These 101 ILPs have very high early surrender penalty. So people who want to give up the plans have no choice but either to continue with it or just bite the bullet. If they continue with the plan, they have to postpone their marriage, not to have kids or borrow more money from ah-longs. This is really sad. Their financial advisers did them a disfavour. Instead of helping their clients achieve financial freedom, they cause their clients lose their freedom.
There are a few companies that could buy over endowments. But they do not accept ILPs. I always wonder why. So I did some calculation to find out.
Below is an actual benefit illustration of the Pruselect Vantage based on $1000 monthly premium 15 years plan purchased by my client from someone else who had a wonderful gift of the gap. The figures of this illustration is based on $12,000 annual premium (annual mode, not monthly mode).
Based on the 9% projection column, the average expense ratio is 3.97%pa. Workings: N=15, PMT=-12000, FV= 272597, PV=0 => R = 5.031%. Average expense ratio is 9% - 5.031% = 3.97%. The average expense ratio is ridiculously high. That is why it is a such a bad product considering the commitment is so long.
Imagine a third party buys a 2nd hand ILP at the end of year 2. This is exactly at the end of the period which the policy has no surrender value. That is why the illustration states that the surrender value is $0. Thus, N=13, PMT=-12000, FV = 272597, PV = 0. The average expense ratio is 1.29%pa. This looks attractive compared to buying unit trusts direct.
How about buying the 2nd hand ILP at the end of year 3? The projected surrender value is $22,880. The average expense ratio is 2.41%pa. This looks bad. In fact, all subsequent years look pretty bad. In practice, if the market value is terrible, you will be buying at low and it could turn out to be a good deal. For example, instead of $22,880, the surrender value was a quarter say at $5,720, the average expense ratio becomes 0.35%pa which is really good.
So a good time to buy a 2nd hand 101 ILP is when the financial adviser has done a bad job in managing the investments causing the underlying investments to be making huge losses.
Conclusions
- The best time to buy over a 2nd hand ILP is at the end of the $0 surrender value period. Typically, this is end of 18 months or 24 months. Of course, there will be no seller willing to depart with $0 surrender value. But if the buyer can buy $3.50 chicken rice for the seller, I am sure the seller will be desperate enough to let go of the policy at $0. Do remember that policyholders who want to surrender their ILPs are trying desperately to offload the 101 ILPs.
- The best time to buy over a 2nd hand ILP in other period is when the financial advisers has already made huge losses in the investments.
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In other words, for customers those 2 times are the worse times to sell or surrender. Well, you’re in luck coz over the next 1.5 yrs or so will see the melt up in stocks. Just hang on for the ride & put on a mental 15% moving stop loss (can reduce to 10% by Apr 2018). When your moving stop loss hit, just sell off your ILP & never look back.