A couple of weeks ago, an adviser from a tied-agency told me that she was shocked to learnt that one of her client's regular premium ILP has zero cash value! She is very worried why this can happen. After asking her a few questions, here was my analysis:

• She sold the ILP to a person who needs very high insurance coverage. Therefore, the mortality charges are significantly.
• Due to the market downturn, there are huge losses in the portfolio
• However, there is a double whamming involved here. The mortality charges does not change for the year (but increases as the insured age increase). Recall that:

Units to sell to cover insurance charges = Mortality / Unit Price

However, unit price has drop a lot while mortality remains the same. Thus, the funds were force sold at a very low price and based on the above equation a large amount of units have to be redeemed.

Another problem which may not be obvious to most advisers is that selling a portion of the portfolio with a high volality increases the probability of drawing down the capital to NIL faster. With the increased in volatility this year, a regular redemption quickens the drawndown.

Therefore, it is of not surprising that the cash value of the ILP is now zero. Woe to those who bought an ILP. I never like an ILP. I also don't understand why some IFA sells ILP when they can sell unit trusts.