“Starting off on the right foot is key!” as the wise saying goes. An investment-linked insurance policy serves as a financial tool that combines insurance and investments. Moreover, this policy provides a variety of funds, including ETFs and mutual funds, in addition to life insurance coverage, catering to the needs of investors. However, is it the right choice for you? Before utilizing it to achieve your goals, it’s important to understand the benefits and charges involved. Discover more by delving into the details ahead.
What is an Investment-linked Policy and How does It Work?
An investment-linked policy (ILP) differs from traditional life insurance policies as it not only provides life coverage but also focuses on wealth accumulation. It combines life protection and an investment component into a single platform, offering policyholders a convenient and hassle-free way to manage their finances.
The main features of an investment-linked policy:
- Long-term perspectives: Since the primary objective of an ILP is to achieve financial goals, more quickly compared to traditional plans by investing in global funds. Since both wealth creation and life insurance protection are long-term spans, policyholders can effectively manage both aspects within a single platform.
- Multiple fund choices: Similar to an investment fund company, an insurance company provides access to a diverse selection of authorized funds. This extensive range of fund options allows investors to select various combinations of funds that align with their financial targets.
How does it work?
An ILP will use premiums to invest in your specified mutual funds and create a investment portfolio and insurance coverage, measured in units according to buy-in prices and premium amounts. The number of units will increase, due to subsequent purchases of investment funds, when you pay subsequent premiums into the policy.
If fund prices rise, your portfolio value will increase; on the contrary, if fund prices fall, so will your portfolio value. You should not let short-term fluctuations in the market disturb you as you opt for mid-to-long-term growth. The policy deducts the cost of insurance and administration expenses by selling units in the portfolio in equivalent amounts, mostly every month. The charges may reduce your portfolio value.
Regarding administration fees and the cost of insurance, the former is constant most of the time and subject to annual review; the latter may vary much from year to year, contingent on individual factors like gender, age, sum assured, and occupation. One investment tactic for boosting your investment value is decreasing the cost of insurance by reducing the sum assured. The disadvantage is you will have less life protection upon death.
Types of ILPs
There are two types of investment-linked plans are available for investors.
- Single-premium ILP: The ILP is a lump-sum payment plan. A client deposits a once-for-all amount of money buying investment funds like mutual funds or ETFs after deducting the cost of insurance and administration fees. The portfolio value will depend on fund performances and subsequent charges after.
- Regular-premium ILP: What differs from a single-premium ILP is the regular premium contributions, e.g., monthly, quarterly, half-yearly, and annual payments instead of a whole sum. Like other plans, the policy will deduct unit charges from investment funds in the portfolio.
Both types of ILPs allow policyholders to modify the sum assured to meet their financial objectives.
Examples of ILPs
Here are some popular investment-linked polices in Singapore:
- Tokio Marine: #goClassic, #goInvest, #goTreasures, #goUltra, TM Atlas Wealth TM FlexiCover, TM Wealth Aspire, TM Wealth Enhancer.
- SingLife: SingLife Grow
- Prudential: PRUVantage Assure, PRUSelect, PRUSelect Vantage Premier
- NTUC Income: Flexlink, VivaLink, VivoLink, GrowthLink
- ManuLife: ManuInvest Duo, InvestReady Wealth(II), ManuLink Enrich, ManuLink Investor, Manulife SmartRetire(II)
- Great Eastern: Great Wealth Advantage, Great Lifetime Payout, Great Wealth Multiplier II, Prestige Life Rewards 4, Smart Invest
- AXA: AXA Flex Protector, AXA Wealth Accelerate, AXA Wealth Harvest, AXA Wealth Invest, Pulsar
- AIA: AIA Invest Easy, AIA Pro Achiever, AIA Plantinum Pro Secure, AXA Pro Lifetime Protector(II), AIA Wealth Elite, AIA Platinum Retirement Elite
ILPs are Best for Who?
An ILP(investment-linked policy) is not for everyone. But you may start deliberating if you meet the following ILP investor traits on deciding on purchasing a policy like it.
- Risk taking: ILPs are suitable for investors opting for higher rewards by taking investment risk.
- Mid-to-long horizon: ILPs requires more than 5-year period to grow.
- Charges: Besides insurance costs and adminitration fees, you may incur charges if you surrender policy earlier.
- ILP features: ILP investors should be comfortable in managing investment and insurance in one platform.
- Higher premiums: Policyholders should pay higher premiums for IKPs than other insurance savings plans
- No guaranteed return: ILPs offer no guaranteed cash value and the investment performance may go up and down.
Benefits & Risks of ILPs
Before opting for an ILP, it is essential to carefully assess the potential advantages and disadvantages. Evaluating one’s risk appetite, understanding the lack of guaranteed cash values, and considering the policy’s complexity are crucial steps in making an informed decision about investment-linked insurance policies.
- Potential risk-rewarded return: An investment-linked insurance policy provides a client with access to investments, such as ETFs and mutual funds, having the potential to bring rewarding returns in the long term compared to other traditional savings plans. However, an investor should examine his situation in selecting funds suitable for his risk appetite.
- Free fund switches: Most investment-linked policies allow investors to change funds without fees like front-end loads or redemption charges for some frequencies each month or without limits. One advantage is that an ILP portfolio can enhance its returns by saving the fees usually charged by other financial institutions in the market.
- Policy flexibility: An advantage ILPs provides is that policyholders can balance their seasonal financial needs by adjusting insurance coverage and portfolio value. A policyholder may reduce insurance coverage and increase his portfolio value by using excess premium payments to accumulate more investment units leading to higher value and vice versa.
- Premium holidays: A regular premium ILP allows policyholders to stop premium payments and sell units in the portfolio to pay for the cost of insurance and administration fees for a period. The flexible option lets insureds take a breath during financial stress and have a choice of resuming payments after.
- No guaranteed cash values: Unlike a traditional life insurance savings or endowment plan, an ILP is an investment-structured plan measured in units. Unit prices for funds change so are the ILP investment value. Investors preferring guaranteed cash values should opt for traditional insurance products or alternatives instead of ILPs.
- Increasing insurance costs: An investment-linked insurance policy, in a situation, cannot use available funds to pay for the cost of insurance or other expenses due to insufficient funds in a portfolio.
2 reasons explain this: 1. The portfolio cannot pay for the insurance costs, related to the increasing age, due to inferior fund performance, 2. Policyholders withdrew funds before and did not return the taken-out amount to the portfolio. Suppose an investor cannot deposit more premiums(determined by an insurance company) into his account to pop up the portfolio value; in that case, the policy can lapse due to fund depletion.
- Complexed policy: Unlike other insurance plans or investments, an ILP integrates 2 things in a platform. Policyholders should take more time to understand how the policy works in parallel and, at the same time, achieve their goals. It may not suit clear-cut investors willing to see a loss of investment affects their insurance coverage.
Considerations Before Purchasing an ILP
You should not jump over the following factor while considering an ILP purchase:
- Affordability: The entry bar is higher for investment-linked insurance policies, whether a lump-sum premium payment or other regular premium ILPs. A premium payment period for ILP may last 5 to 20 years; therefore, if you cannot commit to premium amounts or a more extended payment period. In that case, you should consider smaller payments or shorter periods to avoid losses in the future.
- The rationale for an ILP: An ILP is a hybrid insurance policy combining insurance and investment features. It requires you to manage your policy performance regarding investments or insurance actively. Therefore, policy purchase is the beginning, and the next step is to manage your assets in subsequent policy periods.
Managing ILP Investments
Managing your policy is the second step after policy purchase. Here are some crucial steps for you to take:
- Commit to long-term investing: Unlike other traditional life insurance plans, you should commit to handling your policy, particularly the investment part. Regularly monitoring and reviewing your portfolio ensure your investment objectives are on track. Only by doing this do you have a greater chance of success in investing.
- Evaluate risks and personal objectives: A personal financial analysis is an initial step proceeding others in successful investment management. Only through an evaluation can you find out your risk appetite and financial goals before putting your money on your ILP to work.
- Review periodically: Performing periodic evaluations and reviews help keep your investment performance on track with your objectives and take necessary actions on time to adjust and adopt the latest changes in the market.
ILPs vs. Other Investment Plans
|No guaranteed cash value and dependent on fund performance
|Guaranteed cash value and performance bonus(unguaranteed)
|Without cash value
|Death sum + investment portfolio, or death sum or investment portfolio(whichever is greater)
|Death sum + bonus(if any)
Death sum only
|Cash value + bonus
Besides ILPs, you may consider the other two popular life insurance plans in Singapore:
- Whole-life insurance plan: Unilke ILPs, a whole-of-life policy, offers guaranteed cash value and dividend options. Policyholders can withdraw dividends or bonuses without penalty. And guaranteed cash values should stay in the policy except for maturity, policy surrender, or early withdrawal with interest paid. Besides, its protection can last until age 100.
- Term life: Term life is another option for investors unwilling to mix investments and life coverage in one place, so they can better understand related costs and manage finances efficiently. However, as age increases, one should pay more for insurance costs. The policy prices can be formidable when you purchase term life insurance.
Alternative Options to ILPs
Numerous investment options are available nowadays due to technological breakthroughs.
- CPF Investment Scheme – Special Account
- Exchange-tradedn Funds(ETFs) listed on the Singapore Stock Exchange(SGX)
- Regular Savings Plans(RSP)
- Singapore Savings Bonds
- Supplementary Retirement Scheme(SRS)
- Robo-investing services offered by investment brokerages
An investment-linked insurance policy offers an avenue to manage investments and insurance in one policy. However, investors should understand the costs and investing tactics due to its features. Otherwise, a policyholder may lose his policy caused by investment loss or insufficient cash reserve to pay for expenses like insurance costs or administration fees.
- An investment-linked insurance policy (ILP) is a hybrid policy combining investment and life insurance.
- Higher premiums, no guaranteed cash value, but little or no fund switch fees for ILPs
- Commitment to policy tenure and regular review of an investment portfolio are necessary to keep an ILP working for you.
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