ILP has always been in the spotlight since its inception due to the unique manner it is organized in comparison to other types of life insurance. Numerous disputes have taken place as individuals try to determine if ILP is a good solution for improving our financial situation.
It is not uncommon for us to hear about someone who has regretted purchasing an ILP because he or she was unaware of all the features and limitations, and as a result, either the wealth invested is not growing as quickly as he or she expected, or he or she will have to sacrifice the insurance coverage someday down the road. All of these disagreements will boil down to one basic reason: When it was originally introduced, the product was not appropriately positioned.
How does an Investment-Linked Plan (ILP) work?
ILP is a sort of insurance product that helps us accomplish both wealth creation and insurance protection in a single policy. The policy premium will be placed in the designated funds for wealth growth initially. If there is an insurance protection component, insurance charges will be collected regularly. You should know all this while choosing your insurance plan.
The total amount of your insurance at any given moment is referred to as the account value. The initial account value is equal to all initial premiums paid less any costs, and the account value fluctuates over time based on investment performance and any subsequent cash top-ups. The account value also indicates the maximum amount you may get if you surrender the policy.
The cost of insurance is for coverages such as death benefit, disability benefit, and/or critical sickness lump sum pay-out. The cost varies according to your age and the quantity of insurance coverage you have. The older we become, the greater our insurance expenses will be, because we are more likely to file a claim owing to a deterioration in our health. Insurance costs are often deducted immediately from the account value (through the deduction of investment units of equivalent value).
The Benefits of an ILP
1. Low insurance costs with greater flexibility
An ILP’s insurance component functions similarly to a term plan, but with greater flexibility. When we are young, the cost of insurance is incredibly inexpensive, and we also have the opportunity to add or decrease coverage as we see fit.
2. Possibility of better returns with complete control over funds invested
In contrast to a participating plan (usually an endowment plan or whole life insurance), you will have complete control over the investment selection in an ILP. It is entirely up to you whether you want to pursue an aggressive strategy for better long-term gain or protect your savings with a safer portfolio during a difficult period to reduce losses.
3. Increased flexibility
Not only can we alter the insurance coverage to meet our needs at different phases of life, but we can also withdraw the account value for fast cash or even take a break from paying the premium if we are experiencing financial troubles.
4. Leverage your money
When you use an ILP, your money is essentially multitasking to assist you to reach many goals at the same time. “One dollar performing the job of many” allows us to stay on track in life before selecting whether money creation or wealth protection is more essential to us.
Disadvantages of ILP
1. A potentially high initial sales fee
ILPs often have a high initial sales price, making them unsuitable for persons with a limited investment horizon because they can have a significant impact on your overall return in the first few years. The longer we can remain invested in an ILP, the less of an influence it will have on our total portfolio results.
2. High insurance costs as we age
The cost of insurance for an ILP may climb fast as we age, leaving us to confront the difficulty of having to cut insurance coverage in old age when it is most required. Due to the high insurance costs, this might potentially result in little or no increase in the account value, despite having a good investment return.
3. No policy return protection
Because we have complete control over the investing sub-funds, we are also exposed to the whole investment risk, with no guaranteed returns or downside protection. As a result, we are solely responsible for the portfolio’s performance and the selection of sub-funds. A badly managed investment portfolio might be quite damaging to our financial status in the long term.
4. Limited fund selection
Unlike local fund houses or brokerage firms, which may easily provide hundreds or thousands of fund options, the variety of unit-trust accessible in an ILP is fairly limited, often less than 50.
5. Early partial withdrawal costs
Withdrawal or surrender of an ILP in the first few years is normally prohibited, otherwise, you will be charged at the pre-determined rate for the amount removed. This is comparable to participating plans (savings plans or Wholelife plans), where the surrender value is exceptionally low in the first few policy years.
Who should invest in an ILP?
Following all of these conversations about ILP characteristics, we will now define an ILP’s target audience. An ILP is never supposed to be a flexible product that fits readily into anyone’s portfolio because of how it was developed. These are the three kinds of persons who, in my opinion, could benefit from an ILP to attain their goals:
- People on a very limited budget who require some cash flow flexibility while simultaneously seeking insurance coverage and wealth creation at the same time.
- People who have previously completed their basic insurance coverage (through regular term/whole life policies) and are looking for wealth growth with the ability to top up for further insurance coverage at a later date.
- People who are unsure which is more important at the moment (insurance protection or money building), and hence contemplate a “one stone kill two birds” strategy.
If you fall into one of these groups, learn about the different Investment-Linked Plan(ILP ) alternatives on the market, as well as the differences between them, and then choose your best fit ILP.