Tuesday, September 4, 2012

Investment Linked Policy (ILP) Or Universal Life Policy (ULP)?

This article was written specifically by the request of V12 and it is based on my own opinion. Thoughts and comments are welcome.

There seems to be a myth that ILP tends to be more expensive than ULP especially at older age. Like I've said, its a myth. It's just slightly higher, nothing much to shout about.

Insurance charges definitely will go up by age, irrespective of when you get it (this statement has been repeated once too many times, I should probably trademark it). Insurance charges also goes up irrespective of  whether it is ILP or ULP, as we grow older.

An example a RM 400/Room & Board:

To illustrate the insurance charges going up, the premium for an ULP medical plan (PMM5) at the age 21-25 is RM 1,659/year whereas the ILP with the same age range is RM 1,726/year.

As we grow older, the premium for an ULP medical plan (PMM5) at the age 56-60 is RM 5,397/year whereas for the ILP, the premium is RM 5,451/year (premium was extracted from the PMM5 & PRUhealth brochure).

Do note that in ULP (PRUvantage product) there is a no lapse guarantee feature meaning the policy will not lapse, no matter how bad the market is performing so long the premium is being paid.

Whether the ILP can be sustained during a market crash or not is much dependent on when you start the policy, how much cash values it has VS the insurance charges at that time. Hence for a young adult (20+age), considering the insurance charges are low, even if the market were to crash, most likely the cash values + the premium paying is sufficient to cover the insurance charges to prevent policy lapse.

For an ILP, should the market crash suddenly and if the premiums paid is not enough to cover for the insurance charges, the agent will need to request for an additional top up, in order to maintain the policy. Having said that, so far, all of my ILP customers don't need to do that, even though the policy was new and the market crashed in 2008. The reason is because I only propose an ILP to younger ones, and for the seniors (over 45 age) I'd propose an ULP.

That is why if you plan to only get a policy at older age (above 50+), it would be advisable to go for  an ULP OR if you still insist on getting an ILP, put in more on the savers to generate cash values, just in case the market were to suddenly crash. Example for the RM 500/mth premium, RM 400 is used to buy protection, whereas RM 100 is used to buy into the savers to buy you units.

In conclusion, I'd say that ILP is for someone who is below the age of 45 and is open to risk. High risk high returns/loss but if he/she is conservative one can also choose ILP with the options of choosing the bond funds, which in general does not fluctuates that drastically.

Secondly, it pays to have an agent who is well verse in both the medical claims and investment portion if your policy is an ILP. When the funds are at its peak, best to move them to a more secure funds like bonds to secure profit in the event of a market drop. Should the market drops to the lowest, gradually move them back to equity/high risk in order to ride on the wave.

One thing that differentiate pure Unit Trust vs the funds in insurance is that no matter how bad the market performs, people still continue to pay premium. As oppose to pure UT, most investors shy away and prefer to play the wait game before investing. When there is premium paid, the funds are most likely recover faster.

Example would be in 2008, Prudential Equity drop to RM 2.20. However, within 6 months, the equity goes up to RM 2.80. Today, its standing tall at RM 3.60 (which is a good time to switch it to bonds and do premium redirection).

Note to readers: The above is just an illustrations on how ILP can work for you and is NOT my intention the insurance product is being promoted as investment product. The word INSURANCE means focusing on PROTECTION, and NOT INVESTMENT.

The purpose of the ILP is to definitely not purely for investment, but rather to generate more cash values (by taking a bit of risk) so as to be able to prolong the policy holding, especially at later years.