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Understanding Fees and Pricing in Investment-Linked Policies

Calculating and Understanding Fees and Pricing in Investment-Linked Policies

Delve into the fee structure of investment-linked insurance policies (ILPs), learn how the pricing of units is determined, and gauge the actual percentage of your premium that is used to purchase units.

Critical Takeaways

  • Costs within ILPs are comprised of charges for insurance coverage, managing the policy, and the handling of the funds.
  • Be aware that not the entire premium you pay is applied towards buying units; this specific portion is generally referred to as the premium allocation rate.

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Fees and Charges of Investment-Linked Policies (ILP)

When delving into the financial landscape of investment-linked insurance policies (ILP), you can refer to its Product Highlight Sheet (PHS), Product (Fund) Summary, and Policy Contract to clarify every charge linked to the policy.

Here’s a breakdown of the varied fees and charges

  • Insurance Coverage Charges: This covers expenses for death and other associated protections.
    • Factors like the desired coverage amount, age, gender, and smoking habits influence these charges.
    • As you age, these charges might elevate. They’re typically offset by the sale of units from your premiums.
  • Fund Management Fees: This fee is handed to the fund manager responsible for overseeing the sub-fund.
  • Policy/Administration Charges: These are expenses linked to the policy’s routine upkeep.
  • Surrender Charges: If you opt to sell some or all of your units before a predefined period:
    • You’ll be slapped with this fee.
    • Before offloading units, ensure a sufficient amount remains to uphold your desired insurance coverage.

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  • Premium Allocation Rate (PA Rate):
    • Before investing in the sub-fund’s units, an upfront deduction might be made from your premiums. For instance, with a 20% PA rate, out of a $1,000 premium, only $200 will be earmarked for unit acquisition.
    • Over the years, expect the PA rates to climb, possibly exceeding 100%. Some insurers even offer bonus units on premium payments.
    • Check the note at the end for a deeper dive.
  • Bid-Offer Spread:
    • While buying units, you pay the offer price, but when selling, the insurer buys them back at the bid price.
    • This price disparity, typically hovering around 5%, is known as the spread. It covers distribution, marketing, and miscellaneous administrative costs.
  • Fund Switching Charge:
    • Usually, you’re permitted a certain number of charge-free fund switches annually. However, any extra switches invite a fee.

The structure and amount of these charges might not be set in stone. They can pivot based on a range of factors. Generally, they’re financed through the periodic (often monthly) unit sales, inclusive of distribution costs like commissions.


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Premium Allocation in Investment-Linked Policies

Not the entire premium you pay is converted into units for investment. This specific segment used for unit purchase is known as the premium allocation rate, detailed in your Product Summary or Policy Contract.

In single premium policies and additional premiums, the whole sum is generally allocated to buy units. However, for regular premium policies, this depends on the policy’s structure regarding ‘front-end’ or ‘back-end’ loading.

Front-End Loading

A front-end loaded policy typically uses a larger portion of your premiums to cover the insurer’s costs like distribution and administration in the initial years, with a growing percentage going towards unit purchase over time.

For instance, a regular premium policy might allocate:

  • 15% in the first year,
  • 30% in the second year,
  • 50% in the third year,
  • 100% from years four to nine,
  • and then 102% from the tenth year onwards for unit purchases.

An example of how this works in the first year could look like this: From a $1,200 annual premium, 15% ($180) buys units, and the remaining 85% ($1,020) goes towards the insurer’s initial expenses. Units are bought at the offer price and sold at the bid price to cover charges like insurance protection, with the bid price typically being lower.

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Back-End Loading

Conversely, a back-end loaded policy applies 100% of your premiums to buying units from the outset. The insurer’s costs are recovered through charges if you withdraw from the policy within a certain timeframe.

Whether a policy is front-end or back-end loaded, the impact of the charges across the policy’s life tends to be comparable.

Understanding Bid and Offer Prices in ILPs

When dealing with ILPs, the offer price is what you pay to acquire units. For example, with an offer price of $1, your entire $1,000 premium will procure 1,000 units. These units are then sold at the bid price to cover the policy’s various expenses. Typically, the bid price is about 5% less than the offer price, so if the bid price is $0.95, those 1,000 units would be redeemed for $950. The cash value of your ILP is thus determined by the total units you hold and the current bid price.

The bid and offer prices reflect the sub-fund(s) performance and are subject to daily fluctuations.

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Calculation of Unit Prices

The specifics of how unit prices are calculated and their valuation frequency can differ from one sub-fund to another, details of which are outlined in the Product Summary and Policy Contract.

Usually, the fund manager assesses the sub-fund’s net asset value after the market closes by valuing its underlying assets. Once fund management fees are subtracted from the net asset value, the remainder is divided by the total number of units to establish the unit price.

Purchases or sales of ILP units are executed at the next computed unit price—often the next business day’s price—this is sometimes known as the forward price.

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Understanding the fee structure and unit pricing of investment-linked policies can significantly enhance your financial strategy. Remember, the fluctuations in bid and offer prices reflect the ebb and flow of market conditions, making it essential to keep abreast of these changes. With a firm grasp of ILPs, you can confidently use them as a tool for financial growth and stability, paving the way to a more secure and prosperous future.

Ready to harness the potential of investment-linked policies to achieve your financial aspirations? Contact our skilled financial advisors today. We’re committed to providing you with personalized, strategic financial planning that aligns with your long-term investment goals. Don’t wait to take control of your financial journey—get in touch now.

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