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What You Should Know About Investment-Linked Policies

Investment linked plans (ILP) were introduced to the local market by major insurance companies in the early 1990s.

At the time, the only reason people would purchase an insurance policy for themselves was to get coverage in the event of any mishaps, so that their family would still be left with some money.

ILP started gaining its popularity in Singapore as soon as people heard that it can act as both an insurance, and an investment. It was structured to ease the pain that most consumers faced in finding suitable avenues and instruments for investment purposes.


Common ILPs to Choose From

There are a number of ILPs that are available in the market at the moment. You are able to choose from either a Single Premium ILP or a Regular Premium ILP. Everyone will have their own personal preference when it comes to insurance or ILP. Some would see this as a form of short-term investing, while others will deem it otherwise. Forking out a staggering initial amount would not be as nerve-racking for the former as compared to the latter, where you are allowed to make monthly premium payments.



For those who have already set their sights on Single Premium ILP, you should already be aware that it involves a large initial sum. If you are sitting on the fence, uncertain or even half-hearted, do not enter into a ILP contract under any circumstances if you are not aware of the type of sub-fund or life insurance that is being offered to you.



If you are interested in a Regular Premium ILP, work out your finances to see how much spare cash could be set aside. Know that you should set aside a portion of your salary religiously whenever payday comes. Your sub-fund units will be affected if premiums are not made in full each month.

Always keep your finances in check before making a choice to pay a lump sum upfront or a regular payment on a monthly basis, it is not wise to pursue for a higher return if that would put you in a tight spot.


The PROS & CONS of an Investment Linked Policy

Higher Yield

The advantages of an ILP that one will stand to gain would be greater potential returns in comparison to the other insurance that is readily available. Realistically, the projected returns presented are not fabricated as ILPs can indeed offer a better yield amongst most of the insurance plans.



Possibly A Decrease in Coverage


As time goes by, age will catch up on you, followed by the premiums for your ILP. Those under the coverage of permanent disability, critical illnesses, or risk of death will gradually notice the increment in their monthly premiums. To add on to the emotional stress of a higher premium, if your sub-fund is underperforming, you have only a couple of choices to make. Either fork out the difference to offset the new premium amount or compromise on your sub-fund units by taking a portion out to clear the premiums, else the last scenario you would want is to drop your insurance coverage.



Flexibility in Policy Coverage

Due to the nature of how an ILP is being dynamically structured, it allows the policyholder to freely allocate their funds to either increase their life insurance coverage and decrease the number of units invested, or decrease the current coverage and increase the units invested in the sub-fund account as they deem fit or to meet their current financial needs.



No Assurance in Returns


In contingent of the performance of your chosen sub-fund, upon maturity or the day you decide to surrender your ILP to your insurance company, all units in your sub-fund will be based on the maturity date, or time of surrender. Surrendering of an ILP has to be done strategically or timed, else the yield will not be exponential or what you have expected.



Go On Premium Holidays

This benefit of an ILP might come in handy depending on your present financial status. You are able to put your monthly premiums on hold especially if you are switching between jobs or if there is a need to resolve imperative financial issues. The remaining units that are being invested in your sub-fund account will be utilized to make up for the period that you are not able to make your monthly premiums. This is only possible if the units you possess are adequate to sustain the ILP.


Unpredictable Risks Involved


Taking up an ILP would mean that you have to shoulder the unforeseeable risks entirely by yourself. One of the most basic criteria people rely are historic data. In every investment that we make, past data does not equate, and most certainly not an indicator as to how your sub-fund will perform in future. Returns are not assured in any ILP; this is to be taken into consideration if you are looking for a guaranteed return in an investment-linked insurance.



Should You Get an ILP for Yourself?

It is your part to play, your responsibility and due diligence to conduct a prior research to find out as much information as you can about an ILP before committing into one. Weigh your options carefully, instead of picking an investment sub-fund solely based on the high returns that it will potentially yield as there are no guarantees in every investment made. The bigger the risks, the higher the returns, vice versa. Ensure that you are mentally prepared to take on the predicament in the event if the chosen fund is not performing well.



(By Lionel Lau)

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