What is an Investment Linked Policy?
An Investment Linked Policy is a life insurance plan that is made up of 2 components:
- Insurance Policy – Provides you with the underlying health and protection coverage.
- Investment Portfolio – Provides the policy with its increasing cash value via investment growth.
The cash value of the policy comes from the investment units in the Unit Trust Fund(s) you are invested according to your risk appetite.
The insurance premiums you pay on a monthly or yearly basis are being used to purchase investment units in Unit Trust Funds. Depending on the amount of insurance coverage required, some of your investments in the unit trust funds are then sold off to pay for your coverage.
Read about: Investing Guide: Unit Trust Funds
Read about: 3 Best Investment Linked Policies in Singapore for Wealth Accumulation (2020 Edition)
Key features of an Investment Linked Policy
We are not going into why an Investment Linked Policy is good or bad for your financial and insurance needs, as we cleared that in another article. Instead, we going to the general features of an Investment Linked Policy to let you judge if the insurance policy features suits you.
- Flexibility of commitment
- No cap on maximum returns
- Dollar cost averaging
- Premium holiday
- Option to change protection coverage
- Diversification of investment
Flexibility of commitment
Yes, everyone loves this word when it comes to committing a certain portion of your salary into a long-term saving. People tend to worry about rainy days.
ILP provides you with the flexibility to withdraw your savings by selling off part of your units in your investment funds. You are also allowed to do an ad-hoc top up to your policy at any point in time.
No cap on maximum returns
As this is an investment policy, there is no upwards cap on how much compounded financial returns you can expect upon surrendering your policy or maturity. Regular portfolio review and switching of the underlying unit trust funds must be done, in order to maximise your financial returns.
Read about: How can I accumulate a million dollar (Realistically)
Dollar cost averaging
ILP works best if your premiums are paid on a monthly basis. As your investment funds are purchased monthly when you pay your premiums, over the time term, this results in your investment purchased at an average market price.
If the selected funds are not performing well, an ILP also allows switching of your investment in the respective unit trust funds. This switching will be done without any incurred switching fee, unlike a direct investment into invidividual unit trust funds.
Read about: Investing Guide: Reasons to Invest in Unit Trust Funds
An ILP has the option to go on premium holiday with no charges or interest incurred. Basically, this means you can stop paying your insurance premium during a period of financial hardship without affecting your insurance coverage.
Do take note that every month, units will still be deducted from your funds to pay for the premiums for your term policy portion. The investment-linked policy will be void with all attached insurance coverage crease when the investment cash value runs out.
Option to change protection coverage
An ILP allows you to vary the amount of protection you need. You have the option to choose a lower coverage when you just started working and is still single. When life stages change, you have the option to increase your coverage to suit your needs. When a higher coverage is chosen, do take note that the cost of insurance will be higher and the amount invested for investment returns will be lowered.
Diversification of investment
With a variety of investment funds to choose from, you reduce the investment risk of putting too many eggs in one basket.
Who are Investment Linked Policies suitable for?
ILP are generally suitable for people with an aggressive risk profile and a longer time horizon. As an ILP includes an investment instrument, returns are not guaranteed. When you purchase an ILP, you must be prepared that your cash value will fluctuate daily due to the fund prices changes.
You must also be prepared to invest over a long time horizon. This is especially true for regular premium ILP as the charges are often high in the early years. The breakeven of an investment-linked policy may take as long as 20 years.
Read about: 5 ways to beat rising inflation in Singapore
What are the Investment Linked Policies Available?
Without preferences and in no order of ranking, here are some of the popular Investment Linked Policy available in Singapore:
Aviva: Aviva MyLifeInvest
AXA: AXA Pulsar
Great Eastern: Great Eastern SmartInvest
Manulife: Manulink FlexiProtect
NTUC Income: Vivolink
Prudential: Prulink Supergrowth Cash
Read About: 3 Best Investment Linked Policies in Singapore for Wealth and Coverage (2020 Edition)
What should you consider when taking up an Investment Linked Policy?
Investment linked policies (ILPs) are suitable for young adults who just started working, with a low financial budget of savings but seeking insurance coverage with potential for high wealth accumulation. Unlike normal life policies whereby the insurance coverage is levelled from the first day of purchase, you may need to reduce your coverage for ILP when you turned older.
Read about: Why Investment Linked Policy may not be for everyone
What other options can you consider, besides an Investment Linked policy?
A person with an aggressive risk profile who are looking for unlimited upside potential returns may wish to consider an Investment Linked Policy. However, if you are a risk-averse person, seek products with a guaranteed maturity value upon maturity.
Based on an individual risk profile, alternatives such as a Whole Life Policy or Endowment Saving Policy may or may not be more suitable.
Read about: 3 Best Whole Life Plans in Singapore for Insurance Coverages (2020 Edition)
Read about: 3 Best Endowment Savings Plans in Singapore for Lifetime Wealth Accumulation (2020 Edition)
Considering an Investment Linked Policy or related insurance products?
Compare investment linked policies across insurance companies in Singapore before committing to any particular insurance plan.
Drop us a message if you need more details or advice from an independent financial advisor.