Monday, April 27, 2015

So what are Investment Link Policies and is it suitable for me?

So what are Investment Link Policies?
Investment Link Policies or ILPs combines investment with insurance. It is different from the other plans in a way that you can decide on how much you want to pay for your premium, and the minimum is usually about $100 a month. Based on your premium amount, you can decide on how much coverage you want to get. Part of the premium will be allocated to pay for your mortality charges and the rest will be used to purchase investment funds of your choice. For example:
* You’ve decided to pay $100 a month with coverage of $100000 for death and TPD.  And at your current age, your mortality charges for $100000 are around $10. Like term insurance, your mortality charges will increase as you grow older
Then there is another $10 that needs to be deducted for all the admin, sales and other miscellaneous charges which equates to $80
The rest of your $80 will then be invested into the funds of your choice. Usually, there is a big list of funds for you to choose and each fund are different from each other with different risk profile. Some funds are more volatile which means the prices can fluctuate sharply and regularly anytime. This means there is a possibility of doubling your capital or losing all of it in a short period of time. There are also funds which are relatively stable and despite of the current economic situation, the price of these funds will always fluctuate a little.
The type of funds will be recommended to you by your financial adviser based on your risk appetite and you can have a mix of both. Alternatively, if you have done your research, you can make your own choices
So what are the Pros and Cons of an Investment Linked Plan?
* Pros:  ILPs are flexible as you can decide on the amount of premium that you’re comfortable with. And for that same amount of premium, you can decide on the amount of your coverage. Of course, the lower the coverage, the higher your returns, vice versa
* Cons: The returns ARE NON- GUARANTEED. Even though the projected return rates in ILPs are reflected as 4% and 8% every year whereby life insurance is 3.25% and 5.25% every year. From those numbers, anybody will think ILP may give higher returns and higher coverage for even cheaper premium. But let me stress this again, those are just projected or in layman’s terms, estimated rates of return. They are Non- Guaranteed.
Are ILPs suitable for me?
If you are in your 20s - 30s, you have the money and you are familiar with investment or open to investments (Even though you are alien to investments) go for ILPs. Your financial services consultant aka. Insurance agents are obligated to explain clearly about ILPs and make sure that you understand everything before you even sign on the dotted line. Just remember the rate of return for ILP compared to life insurance is more volatile. Profits and loss is part and parcel of investment. If you cannot take the risk of losing little money let alone maybe half your capital, please don’t even consider ILP.
Well if you are in your 40s - 50s, is life insurance still worth it? I would think term insurance is a better option because buying Investment Linked Plans at the age of 40 and above can cost 5 times more than a term insurance due to its high mortality charges. Given that you will be paying for at least the next 20-30 years, it’s not worth it at all. But in any case, compare the 2 plans. Remember not to just look at the amount of premium you are paying for now, look at the total amount you will be paying out for at least 10 years.
If you have any questions about ILPs and wish to look into it further, please call me, Fauzi at 92394654 for a non-obligatory chat