Investment-linked products(ILP) are often marketed as the investment component of an insurance product. Your premiums are used to buy units in investment–linked sub-fund(s) of your choice. While some of you may not be financially-savvy enough to invest on your own, does buying ILPs ensure you get the returns expected from investing?
What is an investment-linked product?
ILP is a hybrid insurance policy that combines investment and protection in a single product. The premiums you pay provide you not only with insurance coverage but part of the premium will be used to buy units in a specific investment fund of your choice. Some of the units you buy are then sold to pay for insurance and other charges, while the rest remain invested.
Some people like the idea of combining investment and protection as it kills two birds with one stone – building insurance cover and simultaneously allowing one to start in some passive investments. Also, since you do not see the money physically, even if you lose some money, most do not feel the pain! If you are more concerned about getting insurance coverage, make sure the product you buy meets this need.
Flexibility – ILPs offers you flexibility to top up your investments on an ad-hoc basis, make withdrawals or switch funds, although these are subjected to administrative charges. You also get to choose from a wide range of investment-linked funds, allowing you to choose an investment vehicle that suits your risk profile and financial goals.
Diversification – an investment-linked funds can be used to diversify your investment portfolio so that you do not put all your eggs in one basket. Some of the policies allow you to choose up to 3 funds, so you can choose one from a different sector or region to diversify your risk. For instance, you may want to choose a lower risk fixed income fund that earns a lower returns but provide more stability to balance out a riskier fund.
Returns are not protected – if you are looking for a principal-guaranteed fund, ILP may not be the right product for you. The performance of investment-linked funds are not guaranteed and if they do not perform well, the maturity values of your policy will be negatively-impacted.
Insurance coverage might be better elsewhere – Most single premium ILPs offer lower insurance coverage as you pay a lump sum premium to buy units in a sub-fund.
Units may be insufficient for payment of policy charges – While the premiums of an ILP remain constant throughout the life of the policy, the cost of insurance coverage increases as you get older. This means more units may be sold to pay for the insurance charges, leaving fewer units invested under your policy. It could be a possible situation where a combination of high insurance protection and a poor-performing fund results in the value of the units being insufficient to meet insurance coverage charges.
You need to consider your risk profile, insurance protection needs, investment objective as well as the time horizon in order to assess whether you should take up an ILP. The investment-savvy will probably tell you to stay away from ILPs at all cost due to its high administrative charges, but the advantage of cheaper insurance coverage compared to term insurance may attract the young who are just starting out in the work force. As with all other investments, take note of the charges involved,review your policy regularly and choose a good financial advisor who provides good guidance!