Two layer upfront charge

If you invest in a regular premium investment linked product (which is commonly sold in the market), you are hit with a two layer upfront charge, namely:

a) Distribution charge
b) Spread

The distribution charge is the proportion of the premium that is taken away from your savings during the first few years. Typically, this proportion is about 80% during the first year, 50% in the second year and 25% in the third and fourth years. The total taken away is 180% of the annual premium.

If you invest $500 a month, the amount taken away during the first 4 years is 180% of $500 X 12 or more than $10,000. This is the money that is taken away from your savings to pay commisison to the agent and other marketing expenses.

The net amount that is invested is subject to another upfront charge, called the spread. This could be as high as 5% of the invested amount.

For example, if you invest $500 a month during the first year, only 20% or $100 is invested each month. This invested sum has to buy the units at a spread of 5%. This is another upfront charge. After taking away this charge, the actual amount that is invested is only $95. You pay $500 and only get units worth $95.

If you are buying a regular premium ILP, you should ask about these two layer upfront charge. It is too costly. I advise you to avoid this type of investment.