Investment Linked Policy: Is it the best option?

For more about the benefits of Investment Linked Policy, refer to our earlier article: Investment Linked Policy: How does it work?.

Investment Linked Policy: The Disadvantages

It is certain that any financial adviser or planner you meet with can share the benefits of an ILP. The disadvantages are commonly overlooked or not clearly explained. We break them down for you:

Investment Risk

An ILP has no guaranteed cash value when you surrender and cash out your policy. The value of the policy comes from the investment units in the Unit Trust Funds you invested into. The cash value may be higher or lower on a daily basis based on the financial market.

Your principal and returns are neither protected nor guaranteed.

Read about: Investing Basics: Risk Profile and Investment Portfolio

Low initial allocation for investment

During the first 3 years, as low as only 15% of the money you put in every month is used to buy investment units in Unit Trust Funds. The rest is used as the cost and charges to set up the policy. It’s only during the 4th year onwards that 100% of the money you put in was used to buy investment units.

Read about: Investing Guide: Unit Trust Funds

High insurance charges

As you get older, the insurance charges get higher. In other words, it is more costly to protect yourself. Do take note that mortality charges increase with your age.

Insufficient insurance coverage

As you age, you may face a situation whereby you have insufficient units in the plan for deduction of the high insurance cost. You will need to reduce your coverage according to the number of units left to sustain the policy

What should I consider when taking up an Investment Linked Policy?

You must also be prepared to lose your high insurance coverage when you aged as the insurance charges will be exceptionally high in your older years. A poor performing investment fund, together with high insurance charges may make you lose your coverage at an older age. This is due to a higher rate of deduction for Mortality coverage than the accumulated investment value.

What other options should I consider?

Do note that if your insurance coverage is ceased at an older age, it will be very expensive to get health and protection coverage. If there is an existing medical condition, it would almost impossible to be insured again by other policies in the market without exclusion clauses. If the priority is for long-term health and protection coverage, you may also consider a Whole Life Policy which built up cash value over time.

Related: Insurance Portfolio, Whole Life Policy,

Read About: How does Whole Life Insurance Policy Works