Investment linked insurance plans (ILP) are the most marketed plans in todays society. These plans allow policyholders to earn returns and withdraw on their account value during the coverage period on top of the payout to their dependents should something unexpected happen.
People nowadays tend to opt for this two-in-one instrument that combines investment and protection products, including cash flow flexibility in insurance coverage and wealth accumulation for wealth growth. A way for them to stay covered and earn a passive income. To understand ILP and how they differ from conventional investment, keep reading!
Divided into two portions
Your insurance payments, also known as premiums, will be divided into two portions. One towards your insurance protection while the other goes into investment funds. Life insurance merely provides a payout of your coverage to your dependents if the unexpected happens to you. So, it’s essential to take control by proceeding with your plan for yourself and your loved ones in the best way possible. ILP helps ensure that your plans and legacy will remain unaffected by the unexpected.
An ILP is often described as a plan that can do it all, so it’s different from conventional insurance. By getting an ILP, you’ll get high returns with minimal risk. That’s not all; you’re free to pursue other interests as you will get insurance coverage along the way. However, the returns you’ll enjoy are not guaranteed and ultimately depend on how the fund performs. It’s also not as straightforward as other insurance plans.
Types of Investment Linked Insurance Plans.
Premiums of traditional insurance are often more expensive than ILPs as they attempt to offset rising insurance charges. ILP usually starts with lower premiums where the insurance charges are paid by selling off your units. Generally, this would not be an issue when your investments are doing well with compounding interests working in your favor.
As mentioned earlier, the return will be based on the fund performance and is not guaranteed. To make the best return out of it, you can pick sub-funds based on factors like the fund’s historical performance or risk classification. You can choose one of the two main types of ILPs below:
- Single premium ILP – This type of ILP is a single and lump-sum premium payment. Under the CPF Investment Scheme, you can purchase ILPs with single premiums using your CPF Ordinary Account or CPF Special Account. This does not apply to regular premium ILPs.
- Regular premium ILP – This type of ILP is a recurring and ongoing payment. Besides requiring you to pay premiums on an ongoing basis, regular premium ILP may allow you to vary the level of insurance coverage you need.
ILP vs. conventional insurance
ILP has become popular over the years and is currently a mainstay in the product portfolio of many insurance providers because this product helps your account value grow. As the account value grows, ILP can ride out market volatility with partial and top-up features. On the other hand, conventional insurance is offered at a premium that remains the same for your entire policy term.
So, your cash value is built up gradually over the years, providing a secure pool of funds. Conventional and investment-linked insurance may include riders on top of the basic coverage. These riders would increase the price of your premium.
Moreover, typically with ILP, you start with low premiums. However, due to the rise in insurance charges as you get older, you may need to top up your premiums to purchase more units to invest in. You can pay insurance charges by selling off your units. Over the years, the charges increase, and more units will be sold off, making it less available for investment.
It can become a problem if your investments have not been doing well and you decide not to upgrade your premiums. If it happens, you’ll most likely reduce your insurance coverage, as the value of the units you own will no longer be enough to cover your insurance cost. This is not the same with conventional insurance, as the premiums paid are higher than ILPs, which helps offset the rising insurance charges.
When selecting an insurance product, keep the above information in mind and compare it with your current and anticipated needs. Conventional insurance products may be a good option should you want to separate your investments from your risk management. Likewise, you may opt to fuse them early on in your career.