Now that you understand what Investment-linked Insurance Policies are, take the opportunity to learn more about them. Remember: Every investment carries a certain amount of risk. The more you learn, the more you earn! If you have not read our article on ILP’s basic, make sure to read: ILPs 101: What are Investment-Linked Insurance (ILPs)?
To help you further understand what ILPs are and what ILPs can do, let’s talk about its two categories and how different they are from life insurance policies.
There are two kinds of ILPs:
Single Premium ILPs – These are ILPs wherein you will have to pay a lump sum premium to get units in a sub-fund. The main drawback of Single Premium ILPs is that they provide lower insurance protection compared to Regular Premium ILPs.
Regular Premium ILPs – These are ILPs paid on a regular basis. Some companies allow monthly, quarterly, semi-annual, or annual payments. Regular Premium ILPs enable you to control the amount of insurance coverage that you need.
One of the things that you must remember in ILPs is this: It does not guarantee any cash value. The value of your investment depends on the market’s performance. For example, if most of your money is invested in equity sub-funds and the equity market is down, your investment will go down as well.
However, it is a double-edged sword. If the market is happy, then your investments are successful, too. This is why investing – not only in ILPs but investing in general – must always be approached with caution and readiness to accept its potential risks.
Some of you may say, “ILPs sound a lot like life insurance policies! What are the exact differences, anyway?” Here are the seven main differences between the two:
Where does my invested money go?
If you own a whole life policy, endowment policy, or term plans, your money goes to the insurance company’s participating fund. The company decides where your money will be placed and how it will be invested. Term insurance policies, however, do not provide returns.
If you put your money in ILPs, it will be placed in your chosen sub-fund. The returns of your investment depending on the value of the assets in the fund. The performance of the sub-funds may be tracked on a daily basis.
Will I receive bonuses?
Participating whole life and endowment policy-based bonuses are dependent on the performance of the fund. These bonuses are not guaranteed unless declared by the insurance company. Term policies do not give bonuses.
In ILPs, the value is dependent on the chosen sub-funds’ performance. There are no bonuses.
Is my investment affected by the volatility of the market?
Participating whole life and endowment policies do not necessarily follow the movement of the market since they smoothen out your money’s returns.
If you invest your money in ILPs, the returns are linked to the performance of the sub-funds, and thus, are directly affected by the market’s movements.
Are my assets are identifiable?
If you invest in participating whole life policies, your assets are kept within the value of your funds.
ILPs identify your money as the number of units held.
What happens to my account’s cash value?
A part of your cash value may be guaranteed, depending on the terms of your policy. When you invest in whole life and endowment policies, your cash value will build up in a few years. If you terminate your policy, the cash value may be less than the total amount that you have given. Term insurance policies do not build cash value.
The cash values in ILPs are dependent on the performance of the sub-fund. Like whole life and endowment policies, early termination of your ILP will give you less than what you already have invested. However, if you leave your money to grow, you may withdraw the cash value of the units you own.
What are the risks that I am shouldering?
If you invest in ILPs, the investment risk is shouldered entirely by you. Unlike in life insurance policies, risks involving the guaranteed benefits are carried by the insurance company, while those not involving promised benefits are brought by the investor.
How about the premium breakdown?
Life insurance policies show the part of the premium used for charges, insurance coverage, and investments. These are all bundled.
ILPs show the part of the premium used for charges, insurance coverage, buying units. These are also bundled and transparent to the last centavo. You would know where each cent was placed and how many units were bought at the time of purchase.
These may all seem daunting to some of you, but don’t worry! You can always count on The New Savvy to help you out. That is why we are here anyway. If you want to know more about ILPs, feel free to reach out to us.
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