04:45 AM Jul 02, 2011
An investment-linked policy (ILP) is a life insurance plan that can provide you with a combination of protection and investment. The premiums that you pay for ILPs typically provide life insurance protection and at the same time, allow you to invest in professionally-managed investment-linked funds.
While you may have the flexibility to vary the level of insurance coverage for your ILPs, there is, however, a trade-off between the amount of insurance coverage provided and the amount available for investment.
It is also important to note that investing in ILPs is a long-term commitment so you should ensure sufficient liquidity of your assets before purchasing an ILP.
There are broadly two types of ILPs - single-premium and regular-premium.
For single-premium ILPs, premiums are paid in one lump sum. For regular-premium ILPs, premiums are paid on a regular basis (monthly, quarterly, semi-annually or annually).
Single premium ILPs generally provide a lower level of protection coverage as compared to regular premium ILPs and tend to be more investment-focused. Regular premium ILPs on the other hand, give you the flexibility to vary the level of insurance coverage to meet your protection needs.
You should first review your needs and then consider the available plans. For example, if you need life insurance protection against death, you can choose among whole life plans which provide guaranteed and non-guaranteed cash values, term plans that do not provide cash values, or regular-premium ILPs for potentially higher returns.
Should you wish to take up an ILP, here are five factors to consider:
Your financial objectives
First of all, consider what your financial objectives are, how much is required and when you would need the money. Investing in ILPs would require a long-term investment horizon and hence they may not be suitable for you if you are investing for short-term needs.
Regular-premium ILPs offer a disciplined long-term wealth accumulation approach with insurance coverage. Most regular-premium ILPs start from as low as S$100 per month. This makes it affordable for young working adults who want to accumulate wealth, and for parents with young children who wish to save for their children's university education.
With the flexibility offered by ILPs, you can withdraw a portion of the available investment value when required - for example, upon reaching retirement or when your child enters university. You also have the option to make top-ups along the way, and various riders may be available to enhance the insurance coverage in your ILP.
Your current life stage
If you are in the early stages of your career or have young children, you may want to include regular premium ILPs as part of your own or your children's overall financial portfolio. At this point, you may not have a high budget to set aside for a comprehensive financial portfolio, but would like to start building up funds for your future family or personal goals. Generally, the cost of insurance protection is relatively low at a younger age. Hence, a greater portion of your premiums will go into buying investment units for your ILP.
As for people in older age groups, you should bear in mind that investment performance can be volatile, and you would need a long-term investment horizon to accumulate your desired investment returns. Secondly, the cost of insurance protection increases with age. You will need to evaluate if you are able to sustain the premium payment for a sufficient period of time.
Ideally, you should start building funds for your protection needs from a young age, such as by investing in a regular premium ILP.
Your risk appetite
Investments carry risks such as liquidity, financial, market and economic risks. Hence, you should note that your principal investment is not guaranteed. When you purchase an ILP, the policy value will depend on the investment-linked funds that you choose to invest in and the investment risks are borne entirely by you.
It is important to select funds that suit your financial goals and risk profile. For example, if you are a conservative investor, you should look at funds that are of a lower risk, such as fixed income funds.
ILPs usually allow you to move your money from one fund to another, providing you with greater control of your investment portfolio, so remember to review your portfolio regularly.
Your investment preference
ILPs allow you to diversify your investments by offering you access to different types of funds, such as equity, balanced, income and money markets in various geographical areas, and at a relatively low investment premium.
For regular premium ILPs, by investing a fixed amount on a regular basis, you make dollar-cost averaging work for you. Over time, each unit that you invest in tends to work out to a lower average price overall than if you were to time the market and invest on an ad-hoc basis.
Your costs incurred
There are regular and ad-hoc charges in ILPs that you will need to be aware of, such as policy fee charges, upfront fees, management fees, fund switching fees, as well as partial withdrawal fees, which may be applicable, if you choose to cash out a portion of your policy value while your ILP is still in-force. It also depends on whether the ILP is a front-end or back-end loaded policy.
For example, a front-end loaded policy means you could possibly be charged an upfront fee on your initial premium and top-up premiums, while a back-end loaded policy means you could possibly incur penalty charges if you surrender the plan early.
If you are interested to find out if an ILP is suitable for you, you may wish to seek the advice of an insurance professional or a qualified adviser who can help you to assess your needs.
Tammy Tan is training manager of education and training at AIA Singapore.
Via: http://www.todayonline.com/Commentary/EDC110702-0000242/Factors-to-consider-before-taking-up-an-investment-linked-policy
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