Investment-linked policies (ILPs) are quite a controversial financial product as they are structured differently than other insurance policies. Yet, offering insurance coverage and investment in one product makes it a popular option for many young professionals and not-so-conservative buyers in Singapore.
Since it became a mainstay product of many insurance providers, it has become a marketable choice among buyers. Yet, ILPs are also one of the most complex forms of insurance. For this reason, some still prefer to keep their investments separate from their insurances.
So, what makes it worth considering? Let’s delve deeper into understanding an investment-linked policy and how it works.
What Is An Investment-Linked Policy?
An investment-linked policy (ILP) is an insurance plan coupled with an investment fund. In an ILP, the investment component funds both the insurance protection and wealth-building aspect of the policy. But with the complexity of the investment plan and the charges, you need to familiarize yourself with important aspects and how these products work.
Types Of Investment-Linked Policies
Generally, an investment-linked insurance policy has two categories:
1. Single-Premium ILPs
A single lump-sum premium payment is used to purchase units in a chosen sub-fund. This type offers less insurance protection and can be purchased under the CPF investment scheme.
2. Regular-Premium ILPs
Consumers pay premiums monthly, quarterly, semi-annual, or annual installments. The policyholder can also vary the level of insurance coverage.
Some ILPs may be categorized as Specified Investment Products (SIPS)because of their complex nature. Hence, financial knowledge is a must when investing in such products.
How Does An Investment-Linked Policy Work?
Investment-linked insurance policies are designed to grow your money while giving you protection at the same time. Like other policies, it will protect in the event of death or permanent disability, depending on the insurance coverage.
The death and total or permanent disability benefits, if included, may comprise the sum assured or the unit value, or a combination of both. However, unlike a whole life insurance plan, an ILP has no guaranteed cash value.
An investment-linked plan has two purposes for its premium. One portion goes to insurance protection while another goes into investment funds or sub-funds of your choice.
Depending on how these investment units are purchased, your premiums will be used to either cover fully or partially the initial charges in the first few years. This is done through front-end or back-end loading.
In the first few years, a percentage of the premium will be used to pay for insurers’ expenses, while the rest will remain invested in sub-funds. Once all the insurer’s expenses are fully covered, all your premiums will then go towards purchasing sub-funds. Periodically, insurance costs will also be charged to cover the protection component.
With back-end loading, the insurer will use all your premiums to pay for the insurer’s expenses. So, until all the insurer’s expenses are paid, your investment and life insurance policy will have zero cash value. And similar to front-end loading, when all the insurer’s expenses are paid you will be able to invest 100% of your premiums to your chosen sub-fund.
Also, before getting an ILP, be prepared to have your money tied up for a certain period. With Initial Unit Allocation, part of your investment will be locked up for a number of years. Funds can only be withdrawn when you surrender or terminate your policy.
Understanding The Investment Part Of The Policy
Insurers will provide you with a list of available ILP sub-funds to choose from. You may choose to invest in one or more sub-funds depending on your investment objectives and risk profile. The guaranteed cash value will depend on the sub-fund’s market performance. Thus, there are many things to consider when choosing a sub-fund.
Some of these considerations include
- Sub-fund’s historical performance:
To get a more contextualized view, evaluate a sub-fund’s performance based on a more extended period, such as ten years.
- Sub-fund’s risk rating:
Each sub-fund has a risk rating that ranges from high to low. Choose a risk rating that matches your risk profile and capacity. Avoid investing in too many high-risk sub-funds. On the other hand, you should also avoid investing in purely low-risk sub-funds as these may yield meager investment returns.
- Your investment skills:
Previous experiences in investing will help you choose the right sub-funds.
ILPs offer investment returns of around 4 to 8%. However, these are not guaranteed. In addition to this, the surrender value may also be lesser than the total premiums paid. Like other types of investment, ILPs are also exposed to risks, and price fluctuations will result in either loss or gain.
Choosing the Right Investment-Linked Policy
Deciding on getting an ILP also means having a personalized plan tailored to your unique financial needs. Here are a few things to consider:
1. Insurance Coverage: ILPs often provide only basic life insurance coverage and total permanent disability. Choose one that allows you to get more comprehensive protection with add-ons on critical illness, accidental, or hospital income needs.
2. Fees And Charges: Compare the prices and charges involved across various providers to get the best fit.
3. Cash Value Accumulation: Check how much cash value you can take should you decide to cancel or terminate the plan.
4. Sub-fund To Invest: Some providers offer up to over 100 plus sub-funds to choose from.
5. Fund Switching: Allows you to switch to another sub-fund when the current sub-fund is not performing well. Insurers often offer a limited number of free switches and charge a fee for the succeeding switches.
Advantages and Disadvantages of Investment-Linked Insurance Policies
Like any other financial product, ILPs also come with features and limitations.
1. High Flexibility
Consumers value the policy’s flexibility as one can
- Switch to another sub-fund depending on your financial needs.
- Make top-ups on their investments.
- Make partial withdrawals for quick cash.
- Adjust premium payments according to the current financial situation.
- Take a break from paying premiums when you face financial difficulties.
- Adjust your level of insurance based on your current health and lifestyle.
You will receive a periodic statement that shows precise details of all transactions, including insurance charges, cash value, and unit prices.
3. Better Returns Over A Long-Term Period
Investment in ILPs may yield higher returns than traditional life insurance and endowment plans. Higher returns are due to various funds performing well over a longer investment horizon.
1. Investment Risks
As mentioned, returns are not guaranteed and depend on the sub-funds’ performance. Thus, you should also check what sub-funds are performing well in the market to avoid losses and the risk of reducing insurance coverage.
2. High Insurance Charges
Insurance charges are used for the protection component of life insurance policies and ILPs. These costs are used to pay the sum assured when faced with significant health events. Thus the cost of insurance rises with age as the risk for death and illnesses also increases.
With high costs, more investments are sold to cover the insurance. As more units are sold, your policy’s cash value decreases, and this may reduce insurance coverage.
3. No Guaranteed Cash Values
Unlike other insurance policies, ILPs do not have guaranteed cash value. This means you could lose your entire investment as your policy’s cash value primarily depend on the sub-fund’s performance.
Should I Get An Investment-Linked Policy?
Getting an Investment-linked policy depends on your risk appetite and if you want greater control of your insurance coverage. ILPs are a precarious investment and would best suit younger or long-term investors.
1. In Terms of Investment
ILPs are volatile investments and may be best complemented by a mix of other investments like bonds, fixed deposits, and cash savings. If you want to focus on your investment needs, you may consider investing in REITs, ETFs, stocks, bonds, or unit trusts instead.
And if you are a few years away from your retirement, you may want to stay away from ILPs and look for a more stable investment method.
2. In Terms of Insurance Protection
It can also be an expensive policy. Thus, you should carefully understand all there is to know about ILPs. If insurance protection is more important to you, a term or whole life insurance policy could be a better and cheaper option.
ILPs also do not guarantee absolute returns. If you prefer guaranteed returns on your investment, you may want to consider endowment plans instead.
Since ILPs are profoundly complex, it is best to talk to a financial adviser before purchasing one. They can explain the complexities of the product provide you with a proper risk assessment. Financial planners can also recommend suitable products to help you achieve your financial goals.
Check out information on Endowment Plan for similar concept with ILPs.
3 Best Investment-Linked Policies To Consider
By now, you should already have a clear understanding of how ILPs work. If you would want to dip your toes in this kind of investment, here are a few of the best ILP options in Singapore.
1. Manulife Invest Ready Wealth (II) – Best ILP For Immediate Dividend Payout
|Minimum Monthly Premium (S$)||S$200 to S$1,000 (depending on minimum investment period)|
|Minimum Investment Period (MIP)||3 years|
1.8% yearly (charged every month for ten years)
|Insurance Coverage||Death Benefit: 101% of premiums paid minus withdrawals (if any)
Critical or Terminal Illness Benefit: Max of S$2M
Maturity Benefit: Get the account value of the policy minus any amount owed, upon the termination of the policy after the insuree’s 99th birthday.
Currently, the Manulife InvestReady Wealth (II) is the only ILP in the market that pays a dividend. Dividends are available monthly or yearly and can be withdrawn in cash or re-invested. This feature makes it a popular choice in today’s market.
Here are some pros and cons to this product:
- 100% of the regular basic premium will be used to buy funds.
- Receive a renewal bonus of up to 20% depending on your annual premium if you renew your minimum investment period.
- Make any premium top-ups outside of your regular basic premium.
- Choose up to 10 funds from over 140 funds and sub-funds offered.
- Withdrawal charges can be up to 100% of the withdrawal amount
- Changes to regular premium payments are only allowed after the MIP.
- There is no death benefit if the policyholder passes away from any existing illness within the 1st policy year.
You will also get a head start with a welcome bonus if you decide to purchase the Manulife InvestReady Wealth (II). This bonus is calculated from a percentage of your 1st year’s regular basic premium and will be converted to additional sub-fund units.
To understand further, check the table below:
|Minimum Investment Period (MIP)||Annual Premium||Welcome Bonus|
|3 years||S$12,000 to S$48,000 and above||0%|
|3 years Flexi||S$20,000 and above||4%|
|5 years||S$12,000 to below S$48,000
S$48,000 and above
|10 years||S$3,000 to below S$12,000
S$12,000 and above
|10 years Flexi||S$6,000 to below S$12,000
S$12,000 and above
|20 years Flexi||S$2,400 to below S$9,600
S$9,600 and above
If eligible, you will also receive loyalty bonuses of up to 0.30%, also depending on your MIP. So, if you are looking for short to medium-term ILPs to grow your funds with minimal effort, Manulife’s InvestReady Wealth (II) could be a suitable option.
2. AXA Wealth Accelerate – Best ILP For Bonuses
|Minimum Monthly Premium (S$)||S$300|
|Minimum Investment Period (MIP)||10 years|
Investment Management Fee
|1% yearly (charged monthly for as long as the policy is active)
3.4% yearly (on Initial Unit Account during MIP; charged every month for ten years)
|Insurance Coverage||Death Benefit:
If the assured’s death occurs before the policy anniversary and close to the 60th birthday:
If the assured’s death occurs on or after the policy anniversary and close to the 66th birthday:
Terminal Illness Benefit: A lump sum of up to S$3M or the death benefit, whichever is lower.
Maturity Benefit: 100% of the total value based on current unit prices
AXA Wealth Accelerate is a regular premium ILP that speeds up wealth accumulation through generous bonuses allocations. These bonuses include
- Start-up bonuses. Up to 200% of your annual premium throughout the initial contribution period (ICP).
- Power-up bonuses. Get a bonus of 1.3% of the account value starting from the 20th year to the end of MIP.
- Loyalty bonuses. Receive a bonus of 1.1% of the account value after the end of MIP.
Here are some pros and cons to this product:
- Top-ups can be as low as S$100 and can be increased in multiples of S$100.
- Allows a 30-day grace period from the due date on paying the regular premium from the due date.
- Get Premium Holidays of up to 60 months after the ICP to the MIP.
- Life Replacement Option allows dependents to replace the assured and continue paying the premiums in case of policyholder’s demise during MIP.
- It allows up to five partial withdrawals with no additional fee.
- Offers over 90 unique funds to directly invest in.
- Long Minimum Investment Period (MIP).
- Power-up bonuses are forfeited when you avail of the Premium Holiday.
- The maximum withdrawal is capped at two times the annual premium.
- Power-up and loyalty bonuses are also forfeited in 12 months after a partial withdrawal.
- No options for receiving dividend pay-outs.
AXA Wealth Accelerate is an excellent ILP option if you are looking for a medium to long-term ILP with lower risks. You can also practice financial discipline through savings as it can offer long-term investment.
3. Tokio Marine Atlas Wealth – Best ILP For Flexibility and Multiple Currency
|Minimum Monthly Premium (S$)||S$630|
|Minimum Investment Period (MIP)||5 years|
|4% yearly (on Initial Unit Account (IUA) throughout the premium payment term; charged monthly)
1.5% yearly (on whole amount including IUA as long as the policy is active; charged monthly)
|Insurance Coverage||Death Benefit: 101% of policy value less indebtedness|
Tokio Marine Atlas Wealth is the most flexible and competitive ILP in today’s market. For one, you’ll get to invest 100% of your premiums right from the start. Moreover, the only portion subject to surrender charges is the initial units paid from premiums during the first 12 months.
Subsequent allocations can be reduced, withdrawn, and unpaid for as long as funds remain above S$3,000.
Here are some pros and cons to this product:
- Allows you to invest in multiple currencies, which can potentially increase returns depending on market performance.
- Start growing 100% of your regular premiums on day 1.
- Receive an initial start-up bonus of up to 19% yearly for five years.
- Receive an annual loyalty bonus of up to 0.30% after the five years of start-up bonus.
- Allows you to add up to 4 lives assured to cover almost a typical family’s insurance needs.
- No dividend payouts.
- High compulsory charges totaling 5.5%.
Indeed, Tokyo Marine is the most flexible ILP in the market as only the first year of premium is locked in. This product is suitable for consumers who want access to strong retail funds as well as accredited investors’ funds.
In choosing wealth-growth instruments, you should always consider the risks involved as well as potential returns to get the desired outcome. You can do this by comparing various ILP products across the market.
- If your chosen fund performs poorly, you will the investment losses.
- Fund performances can be very unpredictable; expect a range of potential performances for different ILPs.
- ILPs are not for everyone, always consult a financial planner to make an informed decision.
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