Why buy an Investment-Linked Insurance Plans In Singapore?

While you are sleeping, your insurance premiums could be earning 10% or higher returns while riding the highs of an exotic emerging market fund. Without question, most of us would choose a more conservative fund for our insurance savings. The point is, your insurance premiums no longer have to sit in low interest earning funds for several decades. Insurers are linking premiums to higher returning savings accounts and investment products. One of the highest yielding insurance-linked products is the investment-linked insurance policy (ILP).

The major difference between a regular insurance policy and an ILP is that you get to choose the underlying fund your insurance premiums will be invested in, and thus the level of risk and potential returns. When you buy an insurance policy, the insurer places your premiums in a fund, typically a conservative fund paying a modest interest rate.

When you buy an ILP, your insurance premiums are used to purchase units in investment-linked sub-funds. The difference is, you can choose the investment fund. You may choose an Asian growth fund or a more conservative income fund. Your insurance policy returns are then based on the returns of the underlying sub-fund.

ILPs 101 : What are Investment-Linked Insurance (ILPs) ?

Low-Interest Rate Fighter

The investment-linked insurance policy (ILP) is an attractive al]ternative in a low-interest rate environment in which some insurance policies are earning historically low returns. The concept behind cash-value insurance policies is that the interest earned can pay the premiums, and anything above the premium is credited to the cash value of the insurance policy. These gains are not taxed until they are withdrawn.  Low-interest rates mean many insurance policies are not getting high enough returns to pay for the premiums.

ILPs provide the insurance policy holder more investment options. If you are young, you may choose a higher growth option, such an Asian growth fund. As you age, you can switch to a lower risk income fund. Some ILPs will permit switching among sub-funds for free. Major insurers provide up to several dozen sub-funds of varying risk profiles to choose from.

Soon you will have much more investment-linked insurance products to choose from. Singapore insurers will need to comply with a new risk-based capital framework in 2017. This will encourage insurers to lower their exposure to more capital-intensive insurance policies that pay bonuses and focus on lower risk assets and ILPs. Whereas insurers guarantee annual bonuses that smoothen out market volatility and thus your insurance policy return, the ILP insurance policy value moves up and down with the market.

Read: The Differences between A Bond and Bond Fund

 

Who are suitable for Investment-Linked Insurance Plans In Singapore?

If you are willing to accept a higher risk to put your insurance premiums to work earning higher returns in the investment market, then ILPs are an option.  Unlike a regular insurance policy, guaranteed cash payouts are not provided. Instead, your payout will depend on the price of the units in the sub-fund you have invested in. If the sub-fund does poorly, then your insurance payout will be smaller. ILPs can be a good way to add growth to a portfolio for a younger investor.

As always, your investment portfolio should allocate risk across the risk spectrum dependent upon your risk profile. Older investors may prefer regular premium ILPs.

Different Benefits & Types Of Investment Linked Insurance (ILPs)

Regular Premium ILPs – Premiums are paid monthly. The annual premium accounts are usually more conservative funds, such as the PRUlink Supersaver account.

Single Premium ILPs – One lump sum premium is paid. Typically, a higher percent is invested in the investment fund and the rest allocated to insurance. The single premium accounts are typically focused on asset growth, such as the PRUlink Supergrowth account.

Even growth seekers need to remember that ILPs allow you to go beyond the traditional safety of an insurance product quickly. Higher risk products are being introduced. This year, NTUC partnered with Schroder Investment Management (Singapore) to offer an ILP on its Global Multi-Asset Income Fund, which invests primarily in high yield bonds and high dividend yielding equities.

High yield bonds are traditionally not on the investment plate of insurers. This product would be suitable for the young growth investor or middle age high net worth individual who wants an annual return of 4% to 5%. The Schroder fund has generated a return of 30% since its inception in 2012. Keep in mind; default rates are very high for high-yield bonds, also known as junk bonds, during recessions.

How can an Investment-Linked Insurance Plans benefit you?

Consider an ILP a self-directed insurance policy. You get to decide where your money goes. You have a choice of underlying sub-funds to match your risk profile and investment criteria. You may also have a choice of deciding what percent of your premium goes towards the insurance policy and how much to place in the investment sub-fund.

Unlike a regular insurance policy with one premium covering one policy, the premium for the ILP is broken down by insurance coverage and sub-fund units. Many insurers, as noted below, specify the amount, starting at 20% for AIA and AXA.

Different Types of Investment-Linked Insurance Plans In Singapore

 AIA

Family First Protect

AXA

GoldenSaver

Prudential

PruLink SuperSaver Account

Types of CoverageDeath Benefit

Maturity Benefit

Death Benefit

Total and Permanent Disability

Terminal Illness

 

Death Benefit

 

Maximum Benefits

 

Accidental Death

 

Permanent Disability

 

Medical Expenses

 21 Funds (various managers) 

 

 

25 PruLink Fund (various managers)
Premium$100/month

20% allocated toward units (year 1), and then yearly increases

$100/month

 

 

20/30/55/105% for years 1-4 and beyond, respectively

$150/month

102.11%

 

What to look out for when purchasing Investment-Linked Insurance Plans In Singapore?

The underlying sub-funds can vary widely regarding risk. Research the investment performance of the fund and its managers. The insurer may use a third party fund manager manage the funds. These sub-fund managers are often major investment banks with long track records as fund managers, so you can readily obtain performance not only on the individual sub-fund but also on the investment manager.

As your premiums increase with age, the returns on an investment-linked insurance plan (ILP) can help pay for an increase in premiums. However, if the value of your units declines, you may have to fund the increase in premiums from your pocket. Your returns will not be guaranteed but subject to the market performance.  Most insurers will give you the option to switch between funds, and may allow one or more switches free of charge.

When will they not pay?

You may redeem the units early; however, a charge will apply. If the fund performance is doing well, you may earn a return even with the early redemption fee. If the fund performance is poor, you may receive back less than you paid in premiums.

Related: Mutual Funds Types and Themes

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C.E.O @ The New Savvy
Anna Haotanto is passionate about finance, education, women empowerment and children’s issues. Anna has been featured in CNBC, Forbes, The Straits Times, Business Insider, INC and The Peak Singapore. She was nominated and selected for FORTUNE Most Powerful Women conference in 2016 (Asia) and 2015 (San Francisco, Next Gen). Anna has 10 years of experience in the financial sector and is currently a Director in Tera Capital. Her previous work experience includes positions at Citigroup, United Overseas Bank, a regional role in Business Monitor and a boutique private equity firm based in Shanghai. She graduated from Singapore Management University (Finance and Quantitative Finance).