You will be able to explain how an ILP puts life cover and units in investment sub-funds into one policy.
Check the name of any adviser who has suggested an investment-linked policy to you on the MAS Register of Representatives, the same search you ran in Lesson 3.1, "What a bank adviser does for the money". Then ask for the policy documents and find the part that says what is guaranteed and what is not. Both checks are quick, and they give you firm ground before the sales conversation goes any further. An ILP has more moving parts than a pitch usually shows, and the basics below cover what you need to follow one.
Take Wei Ling, who is 31 (an example, like all the figures for her here). Over kopi, a university friend who has become a financial adviser suggests a plan that "does two things at once". It would protect her if something happened to her and grow her money in funds. It costs S$300 a month, it is flexible, and she can choose from a range of funds and switch between them. When Wei Ling asks whether it is insurance or an investment, her friend says it is both. That answer is accurate, but it is where most confusion about these plans begins, so it helps to see how each half works and how the two share the same money.
An investment-linked policy (ILP) is a life insurance policy whose value is tied to units in one or more investment funds. It combines insurance cover and investment in a single contract.
The funds inside an ILP are called sub-funds, and you choose them from a list the insurer offers. Sub-funds are investment funds much like the unit trusts in Module 1, with their own managers, holdings and charges. Like unit trusts, they also have their own management fees.
When Wei Ling pays her S$300, some or all of it buys units in the sub-funds she picked, at each sub-fund's unit price. The units she holds make up the policy's account value. Usually every month, the insurer cancels some of those units to pay for her life insurance cover and the policy's charges, and the units left after that are her investment. The insurance is not paid for separately. It is paid for by selling part of the investment each month, for as long as the policy runs.
Sub-fund prices rise and fall with markets, so the value of the units in the policy rises and falls too, and the account value is not guaranteed. In a good market year, the account value grows. In a bad year it falls, while the insurer keeps cancelling units for charges at the same time. Depending on how the policy is designed, part of the death benefit may also depend on the account value, so your cover can move with markets as well.
If the account value falls far enough, there may not be enough units left to pay the monthly charges. The policy can then lapse, which means it ends and the cover stops, unless you pay more in. Read what your own policy says happens in that situation.
The cost of life cover depends on the chance of a claim, and that chance rises with age. In most ILPs, the insurance charge is worked out each month or each year from your current age and the amount of cover. As you get older, the charge rises and cancels more units each year.
At 31, Wei Ling's insurance charge might be a small slice of each premium. In her fifties and sixties, the same cover costs much more. If her account value has not grown enough by then, the rising charges reduce it faster in those later years.
This is the detail most often missed in a sales pitch, because the early years look fine. The benefit illustration shows how charges are projected to change over time, and Lesson 5.4 works through one with you.
An ILP is a life insurance policy, so it is sold and regulated as one. In Singapore it comes with insurance disclosure documents rather than a unit trust prospectus. Expect these:
a product summary, which describes the policy and its charges a benefit illustration, which projects the policy's values, including how charges change over time information on each sub-fund, covering its objective, risks and fees
When the documents arrive, look first for what is guaranteed and what is not. The policy documents state this, and it tells you which parts of the projected values depend on markets.
The adviser selling you an ILP should be a representative of a licensed insurer or financial adviser firm, and should be listed on the MAS Register of Representatives.
After the kopi, Wei Ling explains the plan to Arjun in three sentences. Her premiums buy units in funds she picks. Every month some 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, and she does not know yet. Lesson 5.2, "The charges that set ILPs apart from unit trusts", answers that question, and the course Insurance Decoded covers ILP basics in more depth.
First, write your own three-sentence explanation in the activity below.
Explain an ILP to a friend in three sentences. Cover premiums, units and insurance charges.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).