Life Insurance: Should You Consider an Investment-Linked Policy?

Life Insurance: Should You Consider an Investment-Linked Policy?

October 23, 2024

One of the more complex insurance products!

  • Life insurance is for those who want to protect their loved ones with financial support in the event of death or permanent disability.
  • With Investment-Linked Policies, the savings component found in endowment policies is replaced by an investment component with a higher risk and return profile.
  • Financial experts will often say that the sum assured in your life policy should come to 10 to 12 times your annual income, but what you need will vary depending on many personal and financial factors, so speak with a trusted professional advisor.

Investment-Linked Policy (ILP)

ILPs are pretty complex products. With all insurance choices, it's essential to understand what you need before exploring such an option. Here, the savings component found in endowment policies is replaced by an investment component with a higher risk and return profile. A chunk of the premiums will be used for purchasing units in investment funds. (Endowment policies tend to have a much lower risk profile and typically have guaranteed sums). For consumers who wonder whether their money is better spent on investments or insurance, ILPs can present a way of combining the two into one financial product.

What Is an Endowment Plan?

Endowment plans aim to provide an insurance plus investment policy by receiving bonuses and dividends. Endowment policies have a similar scope of coverage to whole life insurance but are primarily for those saving towards significant financial goals, such as your child's education fund, with a life insurance element attached. Your coverage will typically come to an end after a fixed period that coincides with your financial goals, e.g. 20 years.

With an ILP, your investment returns depend on the performance of the funds and are not guaranteed. The mortality charges for the ILP are funded from your investment returns. These charges increase as you get older. The policy’s non-guaranteed returns feature means that your units may not earn enough to pay them. It's important to review such plans in the context of your overall protection needs as you get older. 

Why Choose an ILP?

In short, flexibility. 

  • Your investments can be altered, topped up or partially withdrawn by changing sub-funds for when your lifestyle needs change
  • If you have regular premium ILP coverage, you’re likely to be able to modify your coverage levels as your lifestyle needs change

There are two types of ILPs:

  • Single-premium - the one-off sum paid upfront to purchase units in a fund
  • Regular-premium - ongoing premiums

Endowment policies are a safer bet than ILPs, but ILPs have the potential for stronger long-term growth.

Endowment policies include capital-guaranteed benefits, with the savings component being built into the monthly premiums. For example, a $300pm insurance premium may be $120 going to insurance protection and $180 to the savings component. ILPs may also offer guarantees, but they tend to be much lower, as befitting the purpose of those policies.

The insurance part 

Your ILP premiums are fixed at the point of purchase and will not increase as you get older. However, the price of the insurance part of the product will usually increase over the years (higher risk of death, severe illness etc.), even if you continue with the same coverage. Extra units are likely to be sold to fund this, thus leaving you with fewer units to build up cash value. Suppose your insurance coverage is high and your sub-fund returns are substandard. In that case, your units may not even cover the insurance price. 

INVESTMENT-LINKED POLICIES. COMPLETED. ✅

Sources: 

  1. https://www.directline.com/life-cover/level-term-or-decreasing-term 
  2. https://www.investopedia.com/articles/active-trading/120814/life-insurance-smart-investment.asp 
  3. https://money.cnn.com/retirement/guide/insurance_life.moneymag/index10.htm 
  4. https://www.mordorintelligence.com/industry-reports/bancassurance-in-asean-market
  5. Cover photo from Pexels

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