How an ILP works: how premiums become sub-fund units and how units are sold to pay charges

An investment-linked policy (ILP) can be summed up in one line: premiums buy units, charges sell units, and the units left multiplied by the unit price are the value of the policy. The fundamental difference from a participating policy is that an ILP's value moves directly with the unit prices of the sub-funds chosen. There are no bonuses, there is usually no guaranteed cash value, and the policyholder bears the investment risk (MoneySense, updated 28 September 2026). This guide follows the money through the policy, step by step; the charges themselves are covered in detail in ILP charges.

Three layers in an ILP: the policy, the sub-fund and the unit

To understand an ILP, start by separating three layers. The outer layer is the policy: the contract between you and the insurer, setting out the death benefit, premiums, charge limits, the actions available to you (top-ups, switches, withdrawals, premium holidays) and the conditions under which the policy lapses. The middle layer is the sub-fund (ILP sub-fund). The LIA defines it as a pool that combines premiums paid by policyholders and invests them in a basket of assets according to a stated investment objective; it can be managed by the insurer itself or by an external fund manager. The inner layer is the unit: the sub-fund is divided into equal shares, and the policy records how many units you "hold".

Units are a book-keeping device for measuring entitlements within the policy: what the policyholder owns is a contractual right against the insurer, not the underlying shares or bonds themselves. This is what separates an ILP from buying a unit trust directly, in terms of counterparty and protection arrangements; see Fund platforms and insurer fund ranges.

How the unit price is set: net asset value, single pricing and forward pricing

Paragraph 12 of MAS Notice 307 provides that units of a sub-fund are issued and redeemed at a price equal to the sub-fund's net asset value (NAV) divided by the number of units in issue; paragraph 75 requires sub-funds to be valued every business day. MoneySense and the LIA guide describe the same sequence: after the market closes, the fund manager values the underlying assets, deducts fund expenses, and divides by the number of units to arrive at the unit price.

Single pricing: the LIA guide (March 2026 edition) states that since 8 October 2021 all ILPs use single pricing based on net asset value. In the LIA's example, with a net asset value of S$1 per unit, a S$1,000 premium used in full to buy units buys 1,000 units, with no bid-offer spread; equally, 1,000 units can be redeemed for S$1,000 at S$1.

Bid-offer spread (older structure): some policies issued earlier still use two prices, an offer price and a bid price, with the spread used to pay distribution and administrative expenses. The LIA guide says the spread is "usually less than 5%", while MoneySense puts it at "typically around 5%". If your older policy statement shows two prices, the cash value is calculated at the bid price.

Forward pricing: MoneySense explains that all ILP buy and sell instructions are transacted at "the next computed unit price", so when you submit a top-up, switch or withdrawal you do not know the price at which it will be dealt.

After the premium goes in: front-end and back-end loading

Not every dollar of premium necessarily buys units. That depends on whether the policy uses front-end loading or back-end loading. The table below is an example given in the LIA guide to illustrate the mechanism; it is not a market standard, and the actual percentages for each product are set out in its Product Summary.

The LIA illustrates both structures with the same annual premium of S$1,200 (all figures are illustrative):

1. Front-end loading: the year-1 premium charge is 85%, so S$1,020 goes towards initial expenses and S$180 buys 180 units at a net asset value of S$1. An insurance charge of S$50 is paid by selling 50 units, leaving 130 units; if the net asset value rises to S$1.10, the cash value is about S$143.
2. Back-end loading: the full S$1,200 buys 1,200 units. After 50 units are sold to pay the insurance charge, 1,150 units remain; at a net asset value of S$1.10 the account value is S$1,265, but surrendering in year 1 incurs a 90% surrender charge, leaving a cash value of about S$126.50.

On the surface the two structures look very different: a front-end loaded policy shows a low account value from the outset, while a back-end loaded policy shows an account value close to the premiums paid. The LIA is clear, however, that the overall effect of charges is similar under both: back-end loading simply defers the cost until surrender. When reading the statement of a back-end loaded policy, look at the net cash surrender value, not the account value.

Why insurance charges are paid by selling units

Regular premiums on an ILP usually stay level throughout the premium term, but the risks of death, disability and illness rise with age, and so does the cost of insurance. Most ILPs do not respond by raising premiums; instead, units are sold periodically to pay the insurance charges (the LIA guide notes these charges may be deducted monthly). This means:

• Cover and investment pull against each other: with a fixed premium, the higher the sum assured, the more units have to be sold each period and the fewer remain to build value.
• The pressure grows with age: when rising insurance charges coincide with poor sub-fund performance, the value of the units may not be enough to pay the charges due; insurance charges may also be raised within contractual limits (see ILP charges).

When the units run out, the policy lapses, and policy illustrations must carry a statement warning of this. There are only three ways to prevent a lapse: top up premiums, reduce the sum assured, or restructure the policy while it still has value. For what to do with a policy you already hold, see If you already hold an ILP.

Premium types and money in and out: single, regular, top-ups, switches and withdrawals

The LIA divides ILPs into two broad groups: single-premium ILPs, paid in one lump sum, and regular-premium ILPs, paid monthly, quarterly, half-yearly or yearly. Some single-premium ILPs allow further premiums at set intervals, known in the market as "recurring single premium". On top of this, money may move in and out of the policy during its life as follows:

The detailed rules for these actions are set out in the policy contract and may differ between products from the same insurer; the time limits for paying out redemption proceeds are covered in How ILPs are regulated.

What you will receive: policy statements and fund reports

An ILP's transparency rests mainly on the documents sent to you periodically. Appendix C of Notice 307 requires the policyholder statement to show:

1. the number and value of units held at the end of the previous period;
2. the number, value and average unit price of units bought during the period;
3. the number, value and average unit price of units sold or cancelled during the period;
4. the number and value of units held at the end of the period;
5. the charges levied by deduction from premiums or cancellation of units, itemised by purpose (such as premium charge, insurance charges and switching fee);
6. the premiums received during the period;
7. the death benefit at the end of the period;
8. the net cash surrender value at the end of the period;
9. any outstanding policy loan.

How often statements are sent depends on the type of policy: once a year for regular-premium ILPs and for protection-oriented single-premium ILPs that meet the 150% threshold, and in principle monthly for other ILPs (Notice 307, paragraphs 35 and 35A); sub-funds also publish semi-annual reports and audited annual reports (paragraph 36).

When reading a statement, items 3 and 5 are the ones most worth recording year by year: how many units were sold each year to pay insurance and other charges, and whether that number is rising faster. This says more about whether a policy can be sustained over the long term than short-term movements in unit prices. If you would like this interpreted against your own circumstances, you can register your request through the contact details on this site.