How Investment Linked Insurance Work | Insurance Series

How Investment Linked Insurance Work

Investment-linked insurance plans (ILPs) feature both a life insurance and an investment component. Find out how ILPs operate and what you should know if you are contemplating whether to purchase one.

Key takeaways

ILPs combine life insurance coverage with investing.

Investment returns are reliant on the sub-fund’s performance, so you need to choose one that suits your investment goals and risk profile.

You face the whole investing risk, there are no guaranteed returns.

Insurance expenses are paid for by the investment element of the ILP. Such costs escalate with age and there is a possibility that your units may not be enough to pay for them.

What it is

Investment-linked insurance plans (ILPs) are policies that contain life insurance coverage and investment components.

Your premiums are used to pay for units in one or more sub-funds of your choosing. Some of the units acquired are subsequently sold to pay for insurance and other obligations, while the remainder stay invested.

ILPs offer insurance protection in the case of death or if included, total and permanent disability (TPD) (TPD). Depending on the policy, the death or TPD benefit may consist the greater of the amount guaranteed or the value of the units in the sub-fund at that point in time or any mix of the two.

The worth of these units relies on their price, which in turn depends on the sub-fund’s performance. This is why ILPs normally do not have any guaranteed monetary values.

Why invest in ILPs?

Some customers favour ILPs because of their versatility.

You may adjust your investments by moving sub-funds as your financial requirements change. In addition, you may also top up your assets and make partial withdrawals.

Most regular premium ILPs provide you the ability to adjust the insurance coverage as your requirements change. For example, you may lower the coverage (subject to a minimum amount assured) or even enhance it (subject to underwriting) (subject to underwriting).

But if you are simply interested about acquiring insurance coverage, an ILP may not be the best ideal solution for you.

Types of ILPs

ILPs may be categorized into two categories:

Single-premium ILPs — You pay a lump sum premium to acquire units in a sub-fund. Most single premium ILPs give lesser insurance protection than regular premium ILPs.

Regular premium ILPs — You pay premiums on an on-going basis. Regular premium ILPs may enable you to alter the degree of insurance coverage you require.

Tip

Some ILPs may be classed as Specified Investment Products (SIPs). Do confirm with your banking institution whether the product you are contemplating is a SIP.

How the investment portion works

The investment strategy of an ILP is governed by your selection of the sub-funds. This is unlike whole life or endowment insurance where the insurer selects the investing strategy.

Since an insurer will generally give you with a selection of sub-funds to pick from, it is crucial that you understand the sub-fund’s investing strategy and approach, as well as the possible hazards.

Tip

If you don't require the insurance coverage, you may use unit trusts and exchange traded funds (ETFs) instead.

What to consider in picking a sub-fund

Choose one of many sub-funds that meet your investing goals and time horizon.

The sub-fund’s previous performance should not be your sole concern. Make sure that you are happy with the sub-fund’s risks and that they are commensurate with your risk profile:

Some sub-funds provide more potential for higher profits but come with a heightened risk of financial losses. On the other hand, some sub-funds (such as cash sub-funds), may be anticipated to offer more modest returns in exchange for comparatively reduced risks.

Switching sub-funds

ILPs enable you to shift your money from one sub-fund to another. This is known as fund switching.

It may be good for you to explore this if your financial circumstances or risk appetite have changed and you no longer find your existing sub-fund acceptable.

Most insurers give a limited number of free swaps and charge a modest cost each switch afterwards. Before transferring from one sub-fund to another, examine whether you are entitled to free switches and if not, how much you would need to pay for the transition.

How the insurance part works

While you are paying the same monthly premium throughout the term of the policy, the cost of insurance normally rises year on year (as you grow older the chance of death, disability and disease increases) (as you get older the risk of death, disability and illness increases). This is even if you keep the same coverage (i.e. amount assured) (i.e. sum assured).

This implies that more units may be sold to pay for the insurance premiums, leaving fewer units to build cash value under your policy.

If you have a mix of high insurance coverage and a badly performing sub-fund, the value of your units may not be adequate to pay the insurance payments. You will have to top up your payment or lessen the coverage.

Tip

If protection is your primary aim, alternative products such as term insurance, may give better coverage at a lesser cost.

What are the risks?

Common dangers connected with ILPs include the following:

Investment risk

The returns are not guaranteed. The value of an ILP relies on how the sub-funds perform.

Do not depend on the historical returns of a sub-fund as an indicator of its future performance.

Insurance coverage costs

Insurance prices climb with age. Your units may not be enough to pay the costs.

For regular premium ILPs, insurers may also raise the cost of insurance coverage, if there has been a continuous growth in claims. If so, any increase would be applied to an entire class of policies and not just to an individual policy.

What's the most you can lose?

ILPs normally do not have any guaranteed monetary values. Hence, you might possibly lose the whole value of your investment.

Before you invest: Things to notice

Consider whether an ILP is appropriate for you:

ILPs are better suited for people with a longer investment horizon to ride out market changes and defray upfront fees which might drastically reduce short-term potential gains.

The insurance coverage amongst ILPs varied. Some are more investment-oriented with very little insurance coverage, whereas others will enable you to pick the quantity of coverage that you desire. Do note that the more you are protected for, the more units will be required to pay for the coverage and that leaves fewer units to be invested.

Do consider if you can keep up with the premiums if you no longer make an income.

Do compare investing in an ILP to investing in other investment products. In certain situations, the sub-fund that you are interested in may also be provided as a unit trust (i.e. without insurance coverage) (i.e. without insurance coverage).

Tip

If insurance protection is your major aim, then you may choose to examine alternative insurance solutions.

After you invest: Review your statements

Read your ILP statements, which your insurance will provide to you at least once a year (or more often) (or more frequently). This statement indicates the value of units in the policy, transactions for the period and charges paid via the selling of units.

Do evaluate this statement to determine whether the ILP and sub-funds chosen continue to fit your requirements. Seek guidance if your circumstances and what you require have changed.

Happy Investing! 😉