10 Terms You Need to Know When Buying an Investment-Linked Policy (ILP)

Investment-linked policies (ILPs) are a type of life insurance that combines two components – life protection and investments – into a single policy. Through an ILP, you premiums are invested to build wealth for your financial goals, while there is also a protection component so that your loved ones will be protected in the event of your death, total and permanent disability (TPD), or terminal illness.

Typically, policyholders also have the flexibility of shifting their coverage levels to focus more on growing their investment nest egg in the later years. This can be useful for those who want to reduce their life coverage, especially after their adult children are no longer financially dependent on them.

As there are many different variants of ILP policies in the market, it would be very useful to understand how particular policies work, as well as be familiar with the terms in the policy. Here are 10 common terms which would be useful if you are considering purchasing an ILP.

1. Single premium VS regular premiums

Often, you have an option to pay for ILPs via a single premium or a regular premium.

For those who choose to pay a single premium, it simply means that a lump sum is paid at the start of the policy, and the majority will go towards purchasing units in a sub-fund (i.e. the investment component). These units will then be sold regularly to pay for any protection component (depending on how much life protection you choose / that the policy provides).

Those paying regular premiums do so on a monthly or annual basis, and the premiums paid each month or year are then split into investing and protection components.

2. Premium holiday

For regular premium ILPs, you may have the flexibility to vary your protection level (e.g. the sum assured that would be paid out in the event of death) or have the option for units to be sold to cover your protection level. This may allow you to take temporary premium holidays (i.e. a period of time which you don't have to pay the premiums on the policy).

This can be a handy option when you face a cash flow emergency, by allowing you to retain the policy while taking a few months to find a new job, recover from an illness, or attend to other pressing financial needs.

Note that there may be charges applied, and you should check with your insurer. Your investments may also shrink to an unsustainable level if you prolong this.

3. Investment component

As mentioned, part of your premiums is used to invest in sub-funds. As you can choose which sub-funds to invest in, you should be familiar with the investment objective of the individual sub-funds that you have chosen.

ILPs typically do not provide any guaranteed cash value component, and how your investments perform will ultimately be a function of how well the sub-funds do. On the other hand, potential returns can be attractive over the long-term as investors enjoy the full benefit of growth in the value of the units.

Many ILPs also offer bonus units at certain milestones of your policy to help you boost your investments.

4. Sub-funds

Your ILP will give you access to a wide range of sub-funds, allowing you to diversify and gain exposure across a variety of asset classes, such as equity, fixed interest (bonds), commodity, property, as well as money market. Individually, these sub-funds may also be sector-specific or region-specific.

These funds are likely to be managed by reputable fund management companies, including (for example, for AXA policies) internally by AXA Investment Managers, or externally by Aberdeen Standard Investments, BlackRock, Goldman Sachs Asset Management, JP Morgan Asset Management, Legg Mason, Nomura Asset Management, UOB Asset Management, Wells Fargo Asset Management and many more.

It is important to select funds that are in line with your risk appetite and ability to take on risk.

5. Risk

First and foremost, you should understand your risk profile and invest in suitable funds. If you are unsure, you can seek the advice of your financial advisor.

With an ILP, you face investment risk as returns are not guaranteed. While there are downsides, you also get to enjoy upsides if the sub-funds you invest in do well. Just like any other investment, ILPs tend to perform better over a long-term horizon.

Charges for your protection component are not fixed either. As grow older, your protection coverage charges also increase alongside the risk of death, disability and illness. If your investments perform poorly and you keep a higher protection level, the value of your investments may decline.

6. Fund switching

When you enter a different life stage or have a diminished risk appetite, you may want to move your investments out of riskier funds and into less risky funds.

You may also find that the sub-fund you have invested in is not performing up to expectations or that it has changed in its exposure to certain companies that you are no longer comfortable with investing in.

When you decide to switch sub-funds, you typically have to pay a redemption fee as well as a sales charge. However, if you aren’t cashing out, many insurers tend to waive fund-switching fees. Do confirm this with your insurer.

7. Fees and Charges

There are certain fees that come within an ILP, and it would be useful to understand these. For instance, administrative fees may be charged by the insurer for maintaining the policy. Next, you usually have to pay an insurance charge or cost of insurance for your protection component. As mentioned, this may increase as you age or as the risk pool deteriorates. Surrender fees or redemption fees may be charged for the partial or full sale of units.

At the sub-fund level, fees are paid to the fund manager for managing the fund. This typically comes out of the fund’s net asset value (NAV) on a yearly basis. To find out how much this can add up to, you can review the fund’s factsheet to uncover its total expense ratio (TER).

8. Withdrawals

You can either make a partial withdrawal or a regular withdrawal. There are typically minimum amounts required for a partial withdrawal as well as a remaining account value.

You can also make regular withdrawals on an annual, semi-annual, quarterly or monthly basis. Similarly, there will be a minimum withdrawal amount for all types of withdrawal frequency.

9. Dollar-cost averaging

Dollar-cost averaging is a strategy employed when you regularly invest in a fund over a period of time. As you do so, regardless of price fluctuations, you will purchase more units when prices are low and less units when prices are higher. As a result, your investment cost will be close to the average price of the asset.

ILPs are also flexible in that they allow you to top-up your investments when you wish to set more aside to invest, or if you feel prices are more attractive during a particular time.

10. Protection component

With an ILP, you will typically be covered against death, TPD and terminal illness. You can choose the coverage level you require to protect your family against any unforeseen happening to you.

Most of the time, you can also enhance your protection with a range of riders catered to your varying needs, such as early, intermediate and advanced stage critical illness (ECI) coverage, and premium waivers. This allows you to stop having to make premium payments while continuing to retain your investment and protection in the event of being diagnosed with a covered illness.

Understand your ILPs

Insurance terms can be confusing for many first-timers, but spending a little bit of time understanding them goes a long way, as you will realise many terms are common among different types of policies. Be sure to speak to your AXA financial consultant to understand more.

Disclaimer:

This article is for general information only and does not take into account the specific investment objectives, financial situation or needs of any particular person. The views expressed herein do not necessarily reflect the views of AXA Insurance Pte Ltd and should not be construed as the provision of advice or making of any recommendation. There is no intention to distribute, or offer to sell, or solicit any offer to purchase any product. We recommend that you seek the advice of a qualified financial advisory professional before making any decision to purchase an insurance or investment product. Whilst we have taken reasonable care to ensure that all information provided was obtained from reliable sources and correct at time of publishing, information may become outdated and opinions may change. We are not liable for any loss that may result from the access or use of the information herein provided.