Investment-linked insurance: Is it right for you?

MANILA - Security and growth are two of the most important financial goals of many investors. Recognizing this need, a number of insurance companies are offering one of the most popular financial products today: the investment-linked insurance plan (ILP).

An investment-linked insurance plan is basically a life insurance plan with an investment component. It provides both a life insurance cover and a return on the portion of your premium that was invested in a sub-fund, a feature that you can enjoy while you are still alive and well.

Why choose an ILP over a traditional life insurance plan?

It’s easy to see why many consumers prefer ILP. ILPs provide the possibility of investment growth, since its underlying assets are linked to stocks and bonds. In fact, depending on the performance of the sub-fund to which a portion of premium is invested, its returns may be higher than that of your insurance policy’s dividends and accumulation rate.

ILPs are also convenient to own, in that you simply speak with one person to get both your protection and earning potential needs. For those people who do not have the time to manage their own funds, the ILP is a big time saver.

ILPs also allow for the easy transfer of one’s investment funds to beneficiaries in the event of death. That’s because when you pass away, all your bank accounts and investment funds are frozen, and your surviving relatives will have to go through the legal and administrative process to access these funds. The only exception will be your insurance plan, and funds in your ILP, which immediately becomes available to your intended beneficiary upon your demise or disability.

However, there are some differences between an investment-linked plan and a whole life or term life insurance plan. In the traditional life insurance plan, the premium is guaranteed to be the same throughout your whole life. In an ILP, this guarantee may or may not be there.

Since there are so many forms of insurance products now available in the market, both traditional and investment-linked, it is necessary to understand exactly what each product offers.

Here are five questions to ask before deciding that an ILP is right for you:

1. What are your investment requirements? Depending on their financial status and life stage, people have different investment needs. For instance, senior or very young people who have no dependents might be better off going for a traditional investment fund placed in an asset that dovetails with their financial goals. Conversely, if all you want is insurance coverage, then just consider a basic whole life or term life insurance plan.

2. How much risk can you take? ILPs are not risk-free products, and returns are not guaranteed. The value of an ILP varies, depending on how its investment portion performs. In contrast, a traditional life insurance would have both guaranteed and the non-guaranteed benefits. The guaranteed benefits are known to you from the moment you sign up for the policy while the non-guaranteed benefits could vary.

3. What is your time horizon? If you are in a hurry to realize a return, remember that insurance plans require a long investment horizon. In fact, they are primarily meant for your beneficiaries in the event of your demise. Even if you choose to go with an ILP, you should not expect returns from its underlying investment assets to be heavily substantial, as these are mostly designed for long-term gain.

4. What are the fees involved when you surrender or encash the plan? Do you see yourself encashing the policy sometime in the future? Do take note that when you surrender any insurance policy, the cash value will be less than the money you have put in. There may also be withdrawal fees and penalties when you encash your policy. Ask your selling agent about policies on encashment and fees and penalties before you make a decision.

5. What are your financial goals? If you choose to get an ILP, it is important to understand the nature of its investment component to ensure that these are aligned with your personal financial goals. If you aim for high growth, then make sure that the sub-fund is invested in an asset class that can deliver on your expected returns.

As with any other investment product, you should thoroughly discuss your concerns with a financial planner before signing up for an ILP to know if it is right for you and understand how it can help you achieve your financial goals.

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