The Two Types of Investment-Linked Policies

Invesment-linked policies are a double-edged sword. Using it correctly can give you a great boost, but you may hurt yourself if you implemented it wrong. It is a policy that requires attention and no attention at the same time. As such, a yearly review for these plans is a must.?

In my post yesterday, I talked about ILPs which can provide for both protection and investment needs—and how you can get the best of both worlds with just one plan!

In general, there are 2 Types of Investment-Linked Insurance policies - Protection-focused and Investment-focused plans. Let me elaborate further.

? Protection-focused ILPs

What are they?

Prioritizes protection against death, permanent disability and critical illnesses while allowing you to invest at the same time. You are able to balance the proportion between protection and accumulation within this plan alone.

What are the dangers?

These plans are great when you are younger, as mortality charges are cheap. Unlike traditional participating plans, the costs of an ILP does not equal the premium paid. The costs are deducted monthly by selling off some of your investment units, depending on the mortality charge for your age and the level of coverage you have chosen. It is recommended to restructure such an ILP before you reach 50 years old. After which, the mortality charges will increase exponentially. Subsequently, the costs may exceed your premium and it will deplete your cash value. Some people wake up one day and suddenly realize they are unable to continue servicing their ILP and are forced to let it go. Such an effect can happen overnight.

How do we mitigate this?

Review your portfolio with a trusted adviser who will breakdown the mortality charges for you each year. A responsible adviser will inform you when it is no longer wise to continue the plan. Ideal time to restructure is around the late 40s because it still gives you a good time horizon to spread out your cash flow if you intend to clear your obligations by retirement age.

Who is suitable for protection-focused ILPs?

This is perfect for parents with young kids. With the high standard of living here in Singapore, it is incredibly difficult to juggle your own insurance premium with those of your kids (especially if you have more than 1 kid). The protection-focused ILP provides affordable coverage and builds accumulation at the same time. Subsequently, you may use the cash value to subsidize part of the school fees or gift it to your child for his/her 21st birthday gift.

A second group would be students or fresh grads who cannot afford a decent life insurance yet. Again, cheap and affordable coverage with the flexibility to invest. However, keep in mind that as soon as you are able to afford a proper insurance solution, replace your coverage with life and term insurances. The coverage from the existing ILP can be reduced to keep costs low while increasing the proportion in investments.

? Investment-focused ILPs

What are they?

Generally there are 2 types of investment-focused ILPs. The first type functions exactly like mutual funds with some added benefits. The second type is a managed solution typically with higher fees, lock-in period and loyalty bonuses.

The first type is straightforward. You get to choose a basket of funds to invest in. The charges only include the basic sales charge (same as what the RMs at the bank charges) and about 1% for the assurance charge. The assurance charge basically guarantees your principal plus 10% upon death. This feature is very useful for estate planning. The amount of contribution can be flexibly adjusted (increase, decrease, stop). You can also withdraw freely, making this a flexible accumulation plan.

The second type is slightly more complicated. It is an invention by insurance companies to provide managed services along with higher fees. Typically, I do not recommend this type of ILPs because they do not offer as much flexibility. The ongoing management charges can be as high as 5%-7%, which they rebate some of that in the form of loyalty bonuses. Normally, this ILP has a lock-in period where you will be penalized for stopping or withdrawing your funds prematurely.

What are the dangers?

For investment-focused ILPs, there is minimal coverage which means the assurance charge is fixed. There are no surprises as it is a straightforward product. For the second type of ILP, you will need to consider if you can deal with the illiquidity in the initial years, considering that your long-term savings are already illiquid at the start.

Who is it suitable for?

It is suitable for anyone who does not wish to manage any of their investments at all, and would rather have a trusted adviser to guide them throughout their investment journey. It is a great solution for retirees who are already thinking about wealth transfer and legacy solutions. With new products incorporating smarter protection features, their wealth can be effectively passed on to the next generation.

Conclusion

ILPs are great for specific groups of consumers and solves some of the problems most people face especially when they are younger. Just remember to restructure the plan when it is time to!

Should you be keen to know more about these two, feel free to send me a message for your questions and inquiries! ILPs are broadly categorized and it is easy to buy into an ILP that does not serve the desired purpose. I hope this article helps to clarify what ILPs can do and how they are great solutions in their own ways.

It is always important to consult with an expert in the financial services industry that can accurately determine which ILP is suitable for you.

Book a complimentary 1-on-1 consultation session with me today by simply filling in the link in the comment section below and I'll be in touch with you.

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