What is Investment-Linked Insurance Policies ?
If you have ever spoken to an insurance agent before, chances are you would have heard of the product. For those who are new, ILPs are policies offered by insurance companies that provide policyholders with both insurance and investment components. The money collected by the insurer form a pool of fund that is used to invest in various markets instruments (debt and equity). Policy holders have the option of selecting the type of funds (debt or equity) or a mix of both based on their investment need and appetite). Some of the investment you buy are then sold to pay for insurance and other charges, while the rest remain invested.
ILPs provide insurance protection in the event of death or total and permanent disability (TPD), if included. Depending on the policy, the death or TPD benefit may include the higher of the sum assured or value of ILP units a combination of both.
ILPs can be classified into two categories
1) Single premium ILPs: You pay a lump sum premium to buy units in a sub-fund. Most single premium ILPs provide lower insurance protection than regular premiums ILPs.
2) Regular premium ILPs: You pay premiums on an on-going (for example, monthly) basis. Regular premium ILPs may allow you to vary the level of insurance coverage you need.
One of the things that you must remember for ILPs is this: ILPs usually do not have guaranteed cash values. The value of the ILP depends on the price of the units in the sub-fund which in turn depends on the sub-fund’s performance and the prevailing market condition. For example, if most of your money are invested in equity sub-funds and the equity market is down, your investment will go down as well.
While the premiums of an ILP remain constant throughout the life of the policy, the cost of insurance coverage increases year by year as you get older. This means more units may be sold to pay for the insurance charges, leaving fewer units invested to accumulate cash values under your policy.
What risks do ILPs have ?
By now, you should know that ILPs carry investment risks. The value of an ILP varies, depending on how the sub-fund you have chosen performs. The returns are not guaranteed. As with any other forms of investment vehicles, the past returns of a sub-fund are not necessarily indicative of its future performance.
In addition, units may be insufficient to pay the insurance coverage charges. Insurance coverage charges usually increase as you grow older, as the risk of death, disability and illness increases with age. This also applies if you maintain the same coverage (sum assured). Even if you are paying the same monthly premium, more units may be deducted to pay the higher insurance coverage charges, thus leaving fewer units for investment.
Hence, if you have a combination of high insurance coverage and a poor performing investment-linked sub-fund, the value of the units in your policy may not be sufficient to pay the insurance coverage charges. In such a case, you will either have to increase your premium payment or reduce the insurance coverage.
Can you invest with your CPF savings ?
You can use your CPF savings if the ILP is included under the CPF Investment Scheme. Since January 2001, only single premium policies have been allowed under the CPF Investment Scheme. However, CPF members who have purchased regular premium policies prior to 2001 can continue to have the regular premiums paid from their CPF savings. For more information, please refer to the CPF Board website.
Is an Investment-Linked Policy Right for You ?
That depends on what you want out of the policy. If you’re a savvy investor that prefers greater control over the insurance coverage and investment growth of your policy – ILPs are worth considering.
If insurance protection is more important to you than wealth accumulation, you’re probably better off sticking with a term or whole life policy.
Are ILPs suitable for older people ?
You may not need life insurance if you do not have any dependents. For example, your children have grown up and you and your spouse have adequate savings.
If you are considering an ILP, do think about whether you can keep up with the premiums if you no longer earn an income. Also, ILPs are better suited for consumers with a longer investment horizon to ride out market fluctuations and cover initial costs which can seriously limit short term potential returns. Always remember, there may be other investment options that could better suit your needs.
Similarly, if insurance protection is a significant objective, but coverage is required only for a limited period, there could be better insurance options you should consider.
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