You will be able to explain how an ILP combines life cover with units in investment sub-funds.
Wei Ling's university friend has become a financial adviser, and over kopi she suggests a plan that "does two things at once": it protects Wei Ling if something happens to her, and it grows her money in funds. S$300 a month, flexible, with a choice of funds she can switch between. Wei Ling asks whether it is insurance or an investment. Her friend says it is both.
That answer is accurate. It is also where most of the confusion about these plans begins. This lesson explains what one of them is and how its two halves work together, so you can follow the conversation. It covers only the basics, and the course Insurance Decoded goes into them in depth.
An investment-linked policy, or ILP, is a life insurance policy whose value is tied to units in one or more investment funds, called sub-funds, chosen from a list the insurer offers. It combines insurance cover with investment in a single contract.
Here is the mechanism. When you pay a premium, some or all of it is used to buy units in the sub-funds you chose, at the sub-fund's unit price. Those units make up your policy's account value. Then, usually every month, the insurer cancels some of your units to pay for the cost of your insurance cover and the policy's charges. The units left over are your investment.
So the insurance is not paid for separately. It is paid for by selling a slice of your investment each month. Wei Ling would pay S$300, units would be bought, and then units would be taken back to cover her life insurance and the fees, every month for as long as the policy runs.
The sub-funds are investment funds much like the unit trusts in module 1, with their own managers, holdings and charges. Their prices rise and fall with markets. So the value of the units in your policy rises and falls too.
That means an ILP's account value is not guaranteed. In a good year for markets, it grows. In a bad one, it falls, and the insurer keeps cancelling units for charges at the same time. Part of the death benefit may also depend on the account value, depending on how the policy is designed, so the cover can move with markets too. The policy documents state what is guaranteed and what is not, and that is one of the first things to find.
If the account value falls far enough, there may not be enough units to pay the monthly charges. The policy can then lapse, ending the cover, unless you pay more in. Read what the policy says happens in that case.
The cost of life cover depends on the chance of a claim, and that rises with age. In most ILPs, the insurance charge is worked out each month or year from your age at the time and the amount of cover being paid for. So as you get older, the insurance charge rises, and it takes more units each year to pay it.
For Wei Ling at 31, the insurance charge in early years might be a small slice of each premium. In her fifties and sixties, the same cover costs much more, and if the account value has not grown enough, those rising charges eat into it faster. This is the detail most often missed in a pitch, because the early years look fine. The benefit illustration, which lesson 5.4 works through, shows how the charges are projected to change over time.
An ILP is a life insurance policy, so it is sold and regulated as one. In Singapore it comes with insurance disclosure documents, not a unit trust prospectus. You should expect a product summary describing the policy and its charges, a benefit illustration projecting the values, and information on each sub-fund, including its objective, risks and fees. The sub-funds have their own management fees, as unit trusts do.
The adviser selling it should be a representative of a licensed insurer or financial adviser firm, listed on the MAS Register of Representatives, the same register you used in lesson 3.1, What a bank adviser does for the money.
After the kopi, Wei Ling tries to explain the plan to Arjun. She manages it in three sentences. Her premiums buy units in funds she picks. Every month, some of those units are cancelled to pay for her life insurance and the policy's fees. What is left goes up and down with the funds, and the insurance part costs more each year as she gets older.
Arjun asks what the fees are. She does not know yet. That is the next lesson, 5.2, The charges that set ILPs apart from unit trusts. First, write your own three-sentence explanation in the activity below.
Write a three-sentence explanation of an ILP for a friend, covering premiums, units and insurance charges.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).