Created: 4 August July 2021
Purchasing an investment linked insurance plan will not only help you stay protected in your time of need but also afford you an opportunity to reap returns from investments into professionally-managed funds.
Mention insurance and the first thing that comes to mind is protection. Many tend to associate insurance with having a medical card for their health emergencies. While insurance is generally associated with offering life or medical coverage, insurance policies can go beyond protection and provide opportunity to save money and build your wealth.
What is an investment-linked plan (ILP)?
An ILP, as it is commonly referred to, is a policy aimed at not only providing the insured with protection, but also returns on investments placed into professionally managed investment funds.
An ILP is known as a hybrid plan with two components. The first is the protection component that ensures the insured is protected in the event of death, total and permanent disability, and other types of protections of your choice. The second component is investment-based − where part of the premiums you pay are invested in investment funds of your choice.
As an ILP offers the potential for wealth accumulation, some see investing in ILP as part of their financial planning towards retirement. With one of the key selling points of ILP is its ability to generate potential substantial returns, policyholders may view it as a tool to generate passive income as part of their savings plan.
How does an ILP work?
Typically, with an ILP, the premiums paid by the policyholder are used to buy life insurance protection as well as investment units in investment-linked funds. These units will then be held on the policyholder’s behalf until the policyholder decides to redeem them, by selling the units in return for cash.
Investing in an ILP gives the policyholder the flexibility to invest more money into the plan or withdraw money when a critical need arises. When one has extra cash in hand, he or she can top-up the investments at any point in time. Similarly, when in need of some cash, one can undertake partial withdrawals to help finance emergencies. This liquidity for top-ups and partial withdrawals is one of the major draws of ILPs.
However, policyholders must take note that the returns from the ILP are based on the performance of the respective funds. If the market is thriving, the returns will be favourable, however in uncertain times, the returns may not be as lucrative. To help you make the right choice, you are given the option to select funds based on risk classification. Those who wish for better returns could opt for funds with higher risks, and those who prefer to keep their risks low may want to go with less aggressive funds for modest returns on their investments.
Some plans allow policyholders to switch their funds without cost and with unlimited number of switching. Fund switching can help the policyholder to transfer investments into another fund to gain better returns as dictated by market trends.
Protection, flexibility and more
Getting an ILP does not mean that your medical protection will be side-lined. Policyholders can choose to get extra protection such as medical, critical illness, accident, women’s health and even premium protection, by purchasing add-ons.
On the other hand, some also tend to perceive ILPs as risky because they realise that the returns on their investments depend on the performance of the funds. Nevertheless, the policyholder is given complete control over his or her investment risks by selecting the funds of his or her choice. Risk classification as outlined by the insurer helps policyholders to select the type of funds they would like to invest in. In addition to this, policyholders are given the freedom to switch between funds to enjoy a more favourable capital gain.
Is an ILP the right plan for you?
One of the key things to consider when planning to purchase an ILP is your objective in getting an insurance coverage. If you’re merely looking for some medical protection, then a standalone medical plan may be all that you need. If you are keen on having a good life coverage, then a term life insurance may just be what you need. But if you have a keen eye for investment with an objective to build your wealth, you may want to speak to an insurance professional who can offer you advice on the right plans to take on based on your risk appetite.
Another key consideration before signing up for an ILP is analysing your financial situation. Typically, in an ILP, the investment units are sold to pay for the insurance charges. However, do bear in mind that insurance charges rise with age, and this means more investments units have to be sold to pay for rising insurance charges.
Make an informed decision
Anyone who plans to sign up for an ILP should be fully aware of the risks involved as investing in funds would mean leaving it to the market forces. Do take note that investment returns are not guaranteed as unit prices may go down as well as up. Keep in mind, too, that the past performance of any investment linked fund is not an indication of its future performances.
In addition to the above, policyholders may see money tied-up in the funds for a certain period. As such, before deciding on purchasing an ILP, do consult an insurance company or agent for professional advice. Lastly, despite its investment-linked component, the ILP is still an insurance policy with the main aim of giving you and your family the protection needed.