Investment-Linked Policies which are commonly known as ILP are a type of life insurance policy. However, it’s different from regular life insurance policies such that ILP serves dual purposes – life insurance coverage and investment component.
ILP provides life insurance protection for death and, if included, critical illness (CI) and total and permanent disability (TPD).
The investment component of ILP works in a way such that the premiums are used for purchasing units for one or more funds of your choice. Some of the units are sold to pay for your life insurance.
Why people invest in ILP?
ILP provides flexibility:
- Free fund switches as and when needed
- Top-up investments and make partial withdrawals
- Vary the life insurance coverage (subject to minimum sum assured and underwriting)
In general, ILP is more suitable for those who have high risk appetite in investments and, also wish to be covered by life insurance.
Types of ILP
There are 2 types of ILP available:
- Single Premium Investment-Linked Policies: You pay one lump sum premium to purchase units in the fund of your choice. Single Premium ILP offers less insurance protection compared to Regular Premium Investment-Linked Policies.
- Regular Premium Investment-Linked Policies: You pay your premiums at a regular interval. Regular Premium ILP allows you to vary your insurance coverage depending on your needs.
How the investment component in ILP works
Different insurance companies offer different types of funds for ILP. As ILP comes with a list of funds for you to choose, it is imperative that you understand how your selected fund works as well as any potential risks.
How the insurance component in ILP works
The insurance cost in ILP typically increases yearly as the older you become, the higher the risks of death, disability and illness. This is applicable even if the insurance coverage remains the same (i.e. sum assured).
In order to pay for the increased insurance cost, more units may need to be sold, which in turn may leave fewer units to accumulate cash value for your ILP. If you have high insurance coverage but, your funds are performing poorly, the value of your units may be insufficient to pay for the insurance cost. In such cases, you will have to reduce the coverage or top up your premium.
Risks associated with ILP
- The returns of ILP depend on the performance of the funds and hence, the returns are not guaranteed.
- The past performance of funds cannot be used as an indicator for the future performance.
- As the cost of insurance increases with age, your units in ILP may not be sufficient to pay for the insurance cost.
Things to consider before buying ILP
ILP is not suitable for a short-term investment
As there are market fluctuations and, an initial principal amount that you need to deposit, it may be difficult to make a profit in a short term.
Take note of different insurance coverage between different ILPs
Typically, when it comes to insurance coverage in ILP, there are 2 types:
- Investment-oriented ILPs with little insurance coverage
- Flexible ILPs that allow you to vary insurance coverage as you wish
For ILPs that allow you to vary insurance coverage, take note that the higher your insurance coverage is, the more units will be required to pay for your insurance, which in turn leaves less units in investment.
Think for a long term
In the event that you lose your income for any reason, how would you continue paying for your premiums?