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Understanding the Essentials of Investment-Linked Insurance Policies

Guide to Investment-Linked Insurance Policy benefits and strategic financial planning

Last Updated on by Tree of Wealth

Investment-linked insurance policies (ILPs) offer a dual benefit: they serve as both a life insurance policy and a vehicle for investment. Explore the mechanics of ILPs and the essential considerations if you’re pondering the decision to acquire one.

Main Points:

  • ILPs meld the protective assurance of life insurance with the growth potential of investment.
  • The profitability of your investment hinges on the chosen sub-fund’s success, which should align with your financial goals and comfort with risk.
  • The risk of the investment is yours to shoulder, as returns are not assured.
  • The investment slice of the ILP finances the insurance fees, which escalate with age. This could lead to a scenario where your investment might be insufficient to cover these rising costs.

Explaining ILPs

At their core, investment-linked insurance policies are a blend of life insurance cover and investment opportunity. Your premium payments are channeled into purchasing units in selected sub-funds. A portion of these units is liquidated to cover insurance and other related charges, while the remainder continues to be invested.

ILPs assure a safety net in the untimely event of death or, if applicable, total and permanent disability (TPD). The payout for such events may be either the sum assured or the current value of the sub-fund units—whichever is greater—or a specified combination of both.

The worth of these units is directly tied to the performance of the sub-fund, which is why ILPs are typically devoid of any guaranteed cash value.

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The Appeal of Investing in ILPs

ILPs attract a certain demographic due to their inherent versatility.

  • The option to switch between sub-funds to match your evolving financial needs is a key feature, along with the ability to inject additional funds or withdraw them as needed.
  • For those engaged in regular premium ILPs, there’s the added benefit of adjusting insurance coverage to fit your life’s transitions, such as decreasing (with adherence to the minimum sum assured) or increasing coverage (pending underwriting). However, for those solely in pursuit of insurance coverage, ILPs might not represent the best fit.

Classifying ILPs

ILPs are generally split into two streams:

  • Single-premium ILPs: This type requires a one-off premium payment for sub-fund units, typically offering lower insurance coverage compared to their regular premium counterparts.
  • Regular premium ILPs: These are structured for ongoing premium payments and may offer the flexibility to fine-tune your level of insurance coverage as per your requirements.

Bear in mind that certain ILPs may be designated as Specified Investment Products (SIPs). It’s advisable to verify with your financial advisor if the ILP you’re considering falls under this category.

Mechanics of the Investment Component in ILPs

The investment framework within an ILP is a result of your chosen sub-funds, setting it apart from whole life or endowment policies where the investment decisions rest with the insurer. With a variety of sub-funds offered by insurers, it’s crucial to grasp each fund’s investment strategy, methodology, and associated risks.

Also, should insurance coverage not be a necessity for you, alternative investment avenues like unit trusts and exchange-traded funds (ETFs) might be worth considering.


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Selecting the Right Sub-Fund

When sifting through sub-funds, align your choice with your investment goals and timeline. While a sub-fund’s past performance can inform your decision, it’s imperative to ensure that you’re at ease with its risk level and that it resonates with your risk tolerance:

  • Some sub-funds might dangle the carrot of higher gains but at the cost of increased financial jeopardy. Conversely, others, like cash sub-funds, might promise steadier but more modest returns for less risk.
  • Within the CPF Investment Scheme, each ILP sub-fund is tagged with a risk classification by the CPF Board, but treat these classifications as general indicators rather than definitive assessments of suitability.

Navigating Sub-Fund Switching

ILPs offer the flexibility to transfer funds between sub-funds, a process known as fund switching. This can be particularly advantageous if shifts in your financial situation or risk preferences render your current sub-fund mismatched to your needs. Insurers generally provide a quota of complimentary switches, post which a nominal charge applies per switch. It’s advisable to check your entitlement to free switches or the fees involved before making a switch.

Mechanics of the Insurance Aspect in ILPs

As you age, despite a consistent monthly premium, the cost of insurance tends to escalate annually due to increased risks of death, disability, and illness. Consequently, a higher number of units might be liquidated to cover these escalating insurance charges, potentially diminishing the cash value accumulation of your policy.

If the sub-fund underperforming coincides with substantial insurance coverage, the resulting unit value may fall short for covering the insurance charges. This scenario would necessitate either a premium top-up or a reduction in coverage.

Should your primary concern be protection, consider exploring other insurance products like term insurance, which may provide more coverage for less financial outlay.


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Potential Risks

The risks inherent in ILPs are multifaceted:

  • Investment Risk: Returns on ILPs are speculative, as they are contingent on the sub-funds’ performance. Past results of a sub-fund are not reliable predictors of future outcomes.
  • Insurance Coverage Charges: With age, the cost of insurance increments, which might exceed the worth of your units designated for charges.
  • For ILPs with regular premiums, there’s also the possibility of insurers raising the insurance costs across a category of policies due to increased claim frequencies, affecting all policies within the class, not just individually.

Maximum Potential Loss with ILPs

Given that ILPs typically lack any guaranteed cash value, the worst-case scenario could see you forfeiting the entire invested amount.

Pre-Investment Considerations

When contemplating an ILP, ponder the following to gauge its suitability:

  • ILPs are more appropriate for individuals with a long-term investment outlook who can weather market volatilities and offset the hefty initial costs that can erode short-term gains.
  • Coverage levels in ILPs vary; some prioritize investment with minimal insurance protection, while others offer adjustable coverage levels. Remember, higher insurance protection translates to more units utilized for coverage costs, reducing the investment component.
  • Reflect on your ability to sustain premium payments should your income stream cease.
  • Evaluate the advantages of ILPs against other investment vehicles. Occasionally, the sub-fund you’re considering might also be accessible as a standalone unit trust.

If your primary concern is insurance protection, it might be prudent to explore alternative insurance avenues.


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Post-Investment Actions: Statement Scrutiny

Carefully examine the ILP statements sent by your insurer annually or more frequently. These statements detail your policy’s unit values, transaction record, and the charges incurred through unit sales.

Regularly assess these statements to ensure that your ILP and its chosen sub-funds remain aligned with your financial goals. If your situation or requirements have evolved, it may be wise to consult a financial advisor.

Embarking on an investment journey with ILPs offers a unique opportunity to blend the growth potential of the markets with the security of insurance coverage. While the path may vary for every individual, the prospect of personalizing your financial strategy to meet both your protection needs and investment aspirations is empowering. With the right approach and periodic reviews, ILPs can be a valuable component in achieving your long-term financial objectives. Stay informed, stay flexible, and let your investments reflect the future you envision.

Ready to navigate the intricacies of investment-linked policies and tailor a financial plan that grows with you? Our dedicated financial advisors are here to guide you every step of the way. Connect with us today for a personalized approach to financial planning that aligns with your unique life goals.

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