Wednesday, August 15, 2012

What is Investment Linked Policy?

The term Investment Link Policy (ILP) can sometimes be very misleading and the main purpose of an ILP in the insurance context is definitely not for the investment value, but rather the protection value.

Older types or traditional types of policies are not as flexible as ILP, for example if 20 years ago you have a Life coverage of RM 20K and subsequently would like to increase the cover to RM 100K, you'll need to purchase another policy to supplement to that policy.

However, with the introduction of ILP, the client does not need to cancel the policy but rather just add/upgrade on to the existing ILP. This gives greater flexibility to the client, while not having to pay for two or more admin policy fees.

Most of us knows that insurance charges goes up by age irrespective of when we get it and when we are retired with our dependents all grow up, we can swing our life or critical illness cover to the much needed medical. Much like the motor vehicle insurance, if one day we decided to stop payment for the car insurance, the coverage will cease. 

Motor vehicle insurance have loading for older cars, an example is if a car is older than 10 years the insurer may load as much as 100%. The same goes to health/life insurance. The older we get the higher the premium it is going to be.

An example would be for a person age 30, the insurance charge for the medical card may be as low as RM 1500/year. This means that if he is serving a premium of RM 150/month, it is sufficient to pay the insurance charges.

However when he is 65, the insurance charges may go as high as RM 4K/year and even though he still continues to pay RM 150/mth, the variance is actually being deducted from his cash values in order to maintain the policy.

In a long run, policies that accumulate cash values tend to last longer, even after we are retired as the cash values in the ILP can help to pay for the insurance charges. 

The main purpose of the ILP is also to be able to generate higher cash values than only relying on dividends as declared by the insurance company. Investor savvy policy holders are able to do funds switching, withdrawal, profit locking, port folio re-balancing etc as if it is Mutual Funds.

Do note that even though you are able to withdraw from the ILP it is HIGHLY NOT RECOMMENDED. If you were to withdraw and when the insurance charges goes up, the policy may be at risk of lapsing at older age.

This is crucial as generally working people tend to lose their company benefits like car, car allowance and most importantly their medical benefits.

Always remember that generally people buy insurance for the PROTECTION value, never for the Investment value.

Since the cash values are tied to the underlying funds, there is a risk that at older age, the cash values may need to be top up should the fund does not perform as it should.