What is an investment-linked plan insurance (ILP)?

The life insurance and investment components of investment-linked insurance policies (ILPs) are combined. C insurance plans)ILPs work and what you should know if you’re thinking about purchasing one.

What are investment-linked insurance policies (ILPs)? 

Investment-linked insurance policies (ILPs) are policies that include both life insurance and investment components. Units in one or more sub-funds of your choice are purchased with your premiums. Some of the units are then sold to cover insurance and other costs, while the rest are kept in the portfolio.

In the case of death or, if included, total and permanent disability, investment-linked insurance plans give insurance protection (TPD). The death or TPD benefit may be the higher of the sum promised or the value of the units in the sub-fund at the time of death, or a mix of the two, depending on the policy.

The value of these units is determined by their price, which is determined by the performance of the sub-fund. This is why ILPs usually do not have any guaranteed cash values.

Why should you invest in ILPs?

ILPs are valued by some customers because of their versatility. When your financial needs change, you can adjust your investments by switching sub-funds. In addition, you can make partial withdrawals and top up your assets.

The majority of regular premium ILPs allow you to adjust the insurance coverage as your needs change. You can, for example, lower or even enhance the coverage (subject to a minimum sum assured).

An ILP, on the other hand, may not be the best solution for you if all you care about is receiving insurance coverage. ILPs come in a variety of shapes and sizes.

investment-linked insurance plans can be categorised into two types:

  • ILPs with a single premium — You pay a one-time premium to purchase units in a sub-fund. Single-premium ILPs often offer less insurance coverage than regular-premium ILPs.
  • ILPs with regular premiums — You pay premiums on a regular basis. Regular premium ILPs may enable you to adjust the amount of insurance coverage you require.

How the investment part of the process works

An ILP’s investment strategy is dictated by the sub-funds you choose. This is in contrast to whole life and endowment policies, where the investment strategy is determined by the insurer. Read more about creating an investment plan.

Because an insurer will usually offer you a variety of sub-funds from which to choose, it’s critical that you understand the sub-investing fund’s strategy and approach, as well as the risks involved.

What factors to consider while selecting a sub-fund

Select one or more sub-funds based on your investment goals and time horizon. The previous performance of the sub-fund should not be your sole concern. Check that you are happy with the risks of the sub-fund and that they are commensurate with your risk profile.

  • Some sub-funds have a larger potential for higher returns, but they also carry a higher risk of financial loss. Other sub-funds, on the other hand (such as cash sub-funds), may be expected to produce more modest returns in exchange for lesser risks.
  • The CPF Board will issue a risk classification to all ILP sub-funds under the CPF Investment Scheme. Please keep in mind that these risk categories are simply a general guide to whether the sub-fund is suitable for you.

investment-linked insurance: How the insurance component works

While you pay the same monthly payment for the duration of the policy, the cost of insurance often rises year after year (as you get older the risk of death, disability and illness increases). This is true even if you keep the same level of coverage (i.e. sum assured). As a result, more units may be sold to cover insurance costs, leaving fewer units to collect cash value under your policy.

If you have high insurance coverage and a low performing sub-fund, the value of your units may be insufficient to repay the insurance expenses. You will have to either increase your premium or cut your coverage.

Things you need to keep in mind to understand your ILP requirements

  • ILPs are better suited to people with a longer investment horizon since they can ride out market swings and offset upfront expenditures, which can severely restrict short-term potential profits.
  • The insurance coverage provided by ILPs varies. Some are more investment-oriented and provide less insurance coverage, whilst others enable you to choose the quantity of coverage you desire. Keep in mind that the more you are protected, the more units will be required to pay for the coverage, leaving fewer units to be invested.
  • Consider if you can afford the premiums if you no longer make a living.
  • Contrast investing through an ILP with investing in other types of investment products. In some situations, the sub-fund in question may also be available as a unit trust (i.e. without insurance coverage).

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