Investment Linked Insurance Products – The Real Deal? (i)

investments blog  

There are many types of insurance plans out there in the market.

 

Getting the right product is crucial to ensure that your loved ones are well covered when unexpected things happen. 

 

 

 

It is therefore important to understand the type of policies that you purchase. You don’t want to be paying premiums for years only to realize that the policy is not suitable for you as this will usually involve financial losses.

 

We have previously had an in depth discussion about term insurance products. We will now discuss another type of life insurance product that are commonly sold in the market – Investment-Linked Products. Investment-Linked Products remain widely popular in Malaysia even though they have begun to fall out of favour in many countries.

 

Why does this remain the case in Malaysia and are policyholders like ourselves better off with the overwhelming dominance of Investment-Linked products in the market?

 

In our mini-series covering Investment-Linked Products, we will seek to explain and demystify Investment-Linked Products, so stay tuned!

 

 

 

What is an Investment-Linked Policy (ILP)?

 

ILP is a product where you can choose your protection and investment mix within one policy. The split of the premiums will depend on the protection level selected. For a given level of premium, if high sum assured is selected, it means that more of the premiums will go to the protection component and hence less will be available for investment.

 

To fully understand an ILP product, there are certain features or key aspects of an ILP product that you will need to be familiar with. These are: 

 

  • The Premiums; 
  • The Unit Funds
  • The Charges;
  • and Liquidity.

 

 

1. Premiums

 

Premiums for ILP products are usually much higher compared to Term Insurance, a type of insurance that is purely protection in nature. This is because part of the ILP premium is allocated into investments. People who are at a life stage where family building is a priority and seek protection in terms of high death benefit cover will find buying term products much more effective and affordable.

 

Premium Holiday. ILP products are sometimes marketed on its “flexibility”, by allowing policyholders to go on a Premium Holiday. This essentially allows policyholders to stop paying premiums for a period of time should there be an event where there is an urgent need to channel their money elsewhere. The coverage of the plan will continue to be provided for by deducting any Cost of Insurance Charges from the unit funds. This basically means a part of your invested fund are sold in order to pay for the Cost of Insurance Charges. 

 

Doing this presents a risk that could be potentially huge and cannot be emphasized enough during the sale of an ILP product. The deduction of any charges on your unit fund reduces the amount of funds you have. It is important to ensure that there are sufficient funds in your account to sustain any further Charges. If your policy funds are exhausted, your policy would lapse. When this happens, you no longer have any protection coverage.

 

People could be lulled into a false sense of security, thinking that they have secured protection coverage for life once they have purchased an ILP, even if they do not make premium payments, however, this is not true.

 

 

 

2. Funds

 

  • Premiums that are paid into the policy are invested in unit funds. Policyholders will be given a range of funds to select according to your risk tolerance levels. A low risk fund would typically invest in a mixture of fixed income securities and fixed deposits while a higher risk fund would typically invest in equities.

 

  • Funds that you can invest in are limited to those that have been selected by the insurance company. Funds are also subject to charges which we will cover more on.

 

  • Misinformation: At times, inexperienced agents sell this as a savings product. While this product can be used to accumulate funds, the growth of the funds are subject to the performance of your selected fund. This means that the amount of funds that can be accumulated will be variable and this product should not be recommended as a savings product.

 

  • As ILPs gives you the flexibility to select the funds you want to invest in, it is important to monitor the investment performance of the funds through the statement of accounts sent to you regularly by the insurance company. If the funds selected has unsatisfactory performance, you can choose to switch the funds. Insurance companies usually allow one or two free switches a year.

 

  • Past investment performance may give a sense of how the fund is going to perform in the future but it is not be a good indicator.

 

 

In our next few articles, we explain the charges and discuss the liquidity of an ILP. We also compare the premium outlay required where we compare a Term Insurance against an Investment Linked Product.

 

Learn More About Term Insurance Here:

 

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InsureDIY Sdn Bhd (Company Number: 1132626-X) is a licensed Financial Adviser with Bank Negara Malaysia. We are independently owned and are not owned by any insurance companies to ensure there is no conflict of interest.  

 

Within the Asia region, we have offices in Malaysia, Singapore and Hong Kong.

 

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