Why investment-linked insurance policies should be given a chance？
They offer unique benefits such as welcome bonus or loyalty bonus and the flexibility to structure your portfolio
Investment-linked policies (ILPs) are a controversial topic when it comes to financial planning. Many of its detractors believe investment and insurance should be kept separate, for they are individual products serving very different purposes.
Yet, ILPs continue to be popular among buyers and have become a mainstay of any insurer’s suite of products.
The controversy lies in the way ILPs are structured. On the surface, ILPs are designed to give you an investment product with insurance components, offering the “best of both worlds” benefits to policyholders. Some ILPs provide very little insurance coverage, with death benefit as the only coverage. As such, these ILPs are focused mainly on investment, with very little insurance charges.
This may not sit well with some investors, who prefer to keep their investments separate from insurance plans.
Like any investment or financial product, ILPs have their positives and negatives. That said, let’s delve into the pros and cons of getting an ILP.
THE CASE AGAINST ILPS
ILP is an insurance product that invests your money in ILP sub-funds while providing insurance coverage.
There is a range of ILP sub-funds to choose from, catering to different investment objectives, risk profiles and time horizons. Some of the units in these ILP sub-funds are then sold to service the insurance portion of the ILP.
And as you age, your insurance charges go up. If your ILP sub-funds do not perform well enough to cover the cost of insurance, you may need to top up the premium portion of your policy or reduce the insurance coverage portion of your ILP; if not, the policy will lapse.
Like any other financial investment product, an ILP carries investment risk, which does not provide guaranteed returns. That means the value of your investments will fluctuate according to market conditions, and you may incur losses if you choose to surrender your policy ahead of maturity.
If you have a conservative risk appetite, it is wiser to choose a traditional life insurance policy that offers some guaranteed cash values, over an ILP.
Unlike a typical insurance plan or direct investment, an ILP comprises ILP sub-funds that are managed by professional fund managers and this incurs a fund management charge.
THE CASE FOR ILPS
While ILPs combine both insurance and investment elements, each product comes with varying proportions of both components. Some products focus mainly on insurance and come with more insurance coverage, providing a high sum assured; while others focus on wealth accumulation and investment, with very little insurance coverage and few options to adjust the coverage.
A key selling point of ILPs is its ability to generate potential substantial returns. It could be used as a tool to generate potential passive income for one’s future investment goals. For example, a working parent may purchase an ILP with a 20-year investment period as a way to provide for his child’s education. He can make withdrawals on the ILP to fund his child’s university fees.
An ILP allows you to make changes to your portfolio of ILP sub-funds in line with your financial goals. Bear in mind that some ILPs charge a fee when you apply to switch ILP sub-funds, while others offer a limited number of switching for free.
ILPs also offer premium holidays — if you need cash for more urgent matters, you can take some time off from paying the monthly premium, without the entire policy lapsing. During this break, the policy will continue selling units from the ILP sub-funds to maintain the ILP’s insurance component. Note that the absence of premiums will impact your policy value, as no new premiums are being invested during a premium holiday.
ILPs offer flexibility when it comes to adjusting your insurance coverage. If you are at important milestones in your life, such as marriage or having a baby, your responsibilities grow together with your liabilities. You have the choice to increase your sum assured for better protection for your loved ones.
On the other hand, you can reduce your insurance coverage by choosing to hold more units in your chosen ILP sub-funds. With an ILP, you can also increase your insurance coverage without having to switch to a new policy. But this applies mostly to ILPs with a stronger protection component, not ILPs that focus on wealth accumulation.
An additional benefit of ILPs is the issuance of welcome or loyalty bonuses. The bonuses are issued at periodic intervals and are meant to boost the value of the ILP, and contributing to higher partial withdrawals should you choose to make them.
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