Investment-Linked Insurance Policies


 

What is an Investment-linked Insurance Policy (ILP)?

Investment-linked insurance policies (ILPs) have both life insurance and investment components. Your premiums are used to pay for units in investment–linked sub-fund(s) of your choice. Some of the units you buy are then sold to pay for insurance and other charges, while the rest remain invested. 

ILPs provide insurance protection in the event of death or total and permanent disability (TPD), if included. Depending on the policy, the death or TPD benefit may comprise the higher of the sum assured or value of ILP units or some combination of the sum assured and the value of ILP units. How much is paid depends on the value of the units of the sub-fund at the time.

Some consumers prefer ILPs because they want more exposure to investments than other life insurance products may provide. But if you are more concerned about getting insurance coverage, make sure the product you buy meets this need. You may need to consider other life insurance products.

ILPs can be classified into two categories:

Single premium ILPs  You pay a lump sum premium to buy units in a sub-fund. Most single premium ILPs provide lower insurance protection than regular premiums ILPs.
Regular premium ILPs You pay premiums on an on-going basis. Regular premium ILPs may allow you to vary the level of insurance coverage you need.

Unlike whole life or endowment participating policies, ILPs usually do not have guaranteed cash values. The value of the ILP depends on the price of the units in the sub-fund which in turn depends on the sub-fund’s performance.

Some investment products have been categorised as Specified Investment Products (SIPs). Do check with your financial institution whether the product you are considering is an SIP. For information on the requirements in place when transacting SIPs, please refer to the Consumer Guide on SIPs requirements. 

While the premiums of an ILP remain constant throughout the life of the policy, the cost of insurance coverage increases year by year as you get older. This means more units may be sold to pay for the insurance charges, leaving fewer units invested to accumulate cash values under your policy.

Investment-linked sub-funds

ILP sub-funds have different features and risks, catering to different consumer preferences. The sub-funds invest in portfolios of assets according to the stated investment objective for the fund. The sub-fund may be managed by the insurer or the insurer’s appointed third party fund manager(s).

What are the benefits?

Some consumers prefer ILPs because they want more exposure to investments than other life insurance products may provide. There is a range of sub-funds to choose from and most regular premium ILPs give you the flexibility to vary the insurance coverage and investment mix according to your changing financial needs.

Choice of sub-funds

ILPs offer a range of sub-funds that you can choose from. It is important to understand the sub-fund’s investment strategy and approach, as well as the potential risks.

Choose a sub-fund(s) that suits your investment objectives, risk profile and time horizon. Do not assess the sub-fund’s return only. Make sure you are comfortable with the sub-fund’s risks and that these are consistent with your risk profile. Some investments offer greater potential for higher returns but come with an increased likelihood of losing money or not performing as expected by the end of your investment horizon. On the other hand, cash sub-funds may be expected to yield more modest returns in exchange for relative safety.

Do not be tempted to take on more risk in exchange for potentially higher returns. Do compare the suitability of the ILP with other investment products.

Please be aware that if you have a combination of high insurance coverage and a poorly performing investment-linked sub-fund, the value of the units in your policy may not be adequate to pay the insurance coverage charges. If so, you will have to increase your premium payment to pay for insurance coverage.

For investments under the CPF Investment Scheme, the CPF assigns a risk classification to all participating ILP sub-funds. For more information, please refer to the CPF Board website. Risk classifications can only be a very broad guide.

What if you want to switch sub-funds?

ILPs allow you to move your money from one sub-fund to another. This is known as fund switching and may be helpful if your financial circumstances and risk appetite have changed and you no longer find your current sub-fund suitable. When selecting or switching sub-fund(s), do take your ability and willingness to take risk, investment objectives, time horizon and other personal circumstances into consideration.

Most insurers offer a limited number of free switches and charge a nominal fee per switch thereafter. Before switching from one sub-fund to another, check whether you are entitled to free switches and if not, how much you would need to pay for the switch.

How can you monitor your sub-fund’s performance?

You can monitor your investment-linked sub-funds by checking the unit prices published daily in newspapers including The Straits Times, The Business Times and Lianhe Zaobao. Some insurers also publish unit prices on their website.

Flexibility

Most regular premium ILPs give you the flexibility to vary the insurance coverage and investment mix if your financial needs change. You may top up your investments, make withdrawals and switch sub-funds. But any increase in coverage will be subject to underwriting.

You may also request premium holidays, during which you can stop paying premiums temporarily without having to terminate your policy. Do check the Policy Contract and Product Summary for the various charges which apply when you make these changes.

What is the difference between an ILP and other life insurance policies?

The key differences between ILPs and other life insurance policies, such as participating whole life and endowment policies and term insurance policies, are summarised in the following table: 

  ILPs  Whole Life, Endowment & Term Plans 
Investment Mandate  Part of your premiums is invested in units in your chosen sub-fund. Returns are directly linked to the value of the underlying assets.

You can track the sub-fund’s performance via the daily publication of unit prices.
For participating policies, all of your premiums go into the insurer’s participating fund. The insurer decides the investment objective and approach for the fund taking into account the insurer’s overall liabilities.

The fund’s performance depends on its investment performance, claims experience and expense levels of the fund.

Term insurance policies do not provide investment returns.
Bonuses There are no bonuses. The ILP’s value depends on the performance of your chosen sub-funds. For participating whole life and endowment policies, bonuses depend on the performance of the fund. They are not guaranteed, but once declared by the insurer, they become vested and are guaranteed.

Non-par and term policies do not pay bonuses.
Returns from policy track the ups and downs of investment markets? Yes, the returns are directly linked to the value of the assets in the sub-funds. For participating whole life and endowment policies, the smoothening of bonuses means that the returns from your policy will not necessarily track the ups and downs of investment markets
Assets of policyholders identifiable? Assets for each ILP policyholder are identifiable in the form of units held. Assets of participating policyholders are maintained at the fund level.
Cash Value You may withdraw the cash value of the units allocated to you, subject to possible surrender charges. Early termination of the policy may be costly and the cash value payable may be less than the total premiums paid. Whole life and endowment policies build up cash value after a few years. Early termination of the policy may be costly and the cash value payable may be less than the total premiums paid.

Term insurance policies do not have any cash value.
Are cash values guaranteed? No, cash values depend upon the value of the sub-fund’s units and are usually not guaranteed. A part of the cash values under a participating policy will be guaranteed.
Investment Risk The investment risk is borne entirely by you. There are two categories of benefits – those which have been declared and are guaranteed and non-guaranteed benefits. For guaranteed benefits, the insurer bears the investment risk. But non-guaranteed benefits (i.e. potential benefits arising in the future) depend on how the insurer’s participating fund performs.
Premium Breakdown The amount of the premium used for insurance coverage, charges and buying units are unbundled and transparent. They are disclosed in the Product Summary, Benefit Illustration and Policy Contract. The amount of premium used for insurance coverage, charges and investment are bundled. They are not separately identified in the Product Summary and Policy
Contract.

What risks do ILPs have? 

Returns are not guaranteed

ILPs carry investment risks. The value of an ILP varies, depending on how the sub-fund you have chosen performs. The returns are not guaranteed. Do note that the past returns of a sub-fund are not necessarily indicative of the future performance of the sub-fund.

Units may be insufficient to pay the insurance coverage charges

Insurance coverage charges usually increase as you grow older, as the risk of death, disability and illness increases with age. This is even if you maintain the same coverage (sum assured). The increasing cost is factored into the amount of premiums we pay. Even if you are paying the same monthly premium, more units may be deducted to pay the higher insurance coverage charges, thus leaving fewer units for investment. If you have a combination of high insurance coverage and a poorly performing investment-linked sub-fund, the value of the units in your policy may not be adequate to pay the insurance coverage charges. In such a scenario, you will have to increase your premium payment or reduce the insurance coverage.

Apart from increasing charges due to age, in the case of regular premium ILPs, insurers may also increase the cost of insurance coverage, subject to limits stated in the Policy Contract, if there has been a general and sustained worsening of claim experience. Generally, any increase would be applied to an entire class of policy and not just to an individual policy.

How much would an ILP cost?

Fees and Charges

You can find the details of all the charges of an ILP in its Product Highlight Sheet (PHS), Product (Fund) Summary and Policy Contract. The different types of fees and charges are as follows:

Fees and charges What it is
Insurance coverage charges
  • Pays for death and other coverage provided for.
  • Charges depend on factors, such as amount of coverage you want, age, gender and whether you smoke.
  • Charges increase with age and are usually funded by the sale of units purchased with your premium.
Fund management fees Payable to the fund manager for managing the sub-fund.
Policy/administration charges Fees for administration of the policy.
Surrender charges
  • Payable for partial or full sale of units before a certain time period.
  • Before selling your units, make sure there are enough units left to sustain the insurance cover you want.
Bid-Offer Spread
  • Units are bought at offer price, and sold at bid price.
  • The difference between offer and bid prices is called the spread and is usually 5%.
  • The spread pays for distribution costs, marketing and other general administration expenses.
Fund Switching Charge
  • A limited number of fund switches are allowed each year without charge.
  • Subsequent switches will be subject to a charge.

Note that fees and charges may not be guaranteed and are subject to change. These fees and charges (including distribution costs such as commissions) are typically deducted from the (monthly) sale of units.  

How much of the premium is used to purchase units?

Purchase of units

The full amount of premium paid may not be used to buy units. The proportion used is commonly known as allocation rate and is stated in the Product Summary and / or Policy Contract. For most single premium policies and top-ups, 100% of your premium is used to purchase units. For regular premium policies, the amount of premium used will depend on whether it has a "front-end" or "back-end" loading.

  • Front-end loading

In a front-end loaded policy, most of the premiums will pay for the insurer’s expenses including distribution and administration costs in the early years. The remainder pays for units. Over time, the amount of premium used to buy units increases until it reaches 100%.

For example, the allocation rates for a regular premium plan may be:

Policy year 1  15% 15% of the first year’s premium will be used to purchase units. 
Policy year 2 30% In the second year, 30% will be allocated to purchase units
Policy year 3 50% In the third year, 50% will be allocated to purchase units.
Policy years 4 - 9 100% From the fourth to ninth year, the full premium will be used to buy units.
Thereafter 102% From the tenth year onwards, 102% of the premium will buy units.

The diagram below illustrates how the allocation rate is applied to the first year premium for a regular premium ILP with front-end loading:

Payment of Premium
Policyholder pays premium.
 Annual premium of $1,200 is paid.
 ß  ß
Allocation of Premium
Insurer allocates a portion of the premium to purchase units in investment-linked sub-fund(s) that the policyholder selects.
Year 1 Allocation Rate: 15%. This means that $180 (15% of $1,200) is allocated to purchase units. $1,020 (85% of $1,200)
goes to pay for initial expenses, which includes distribution and administration costs.
 ß  ß
Purchasing Units
Units are purchased at the Offer Price.
Offer Price: $1
Premium Allocated: $180
Number of Units Purchased: 180
 ß  ß
Selling Units To Cover Charges
Units are sold at the Bid Price to pay charges in the ILP. The Bid Price is usually lower than the Offer Price.

Charges include charges for insurance protection. This depends on the amount of coverage and type of insurance protection selected.
Bid Price: $0.95
Insurance Charge: $50

Number of Units Sold to Pay Insurance Charge: 53 ($50 / $0.95)

Remaining Number of Units in the ILP: 127 (180 – 53)

Cash value of the ILP: $121 (127 units x bid price of $0.95)

 Note: In the above example, the number of units is rounded to nearest whole number.

  • Back-End Loading

Under a back-end loaded policy, 100% of premiums are used to buy units from the start. Distribution and administration costs are covered by back-end charges imposed when you surrender your policy, partially or fully, within a certain period of time. Although the premium allocation structure differs for front-end and back-end loaded ILPs, the overall effect of the charges will be similar.

  • Offer Price

The offer price is the price paid to buy units. For example, if the offer price is $1 and the whole of a $1,000 premium is used to buy units, it will buy 1,000 units.

  • Bid Price

Units are then sold at the bid price to pay for the various charges. There is typically a 5% difference between bid and offer prices. For example, if the bid price is $0.95, 1,000 units can be cashed in for $950. The cash value of the ILP depends on the number of units you have and the bid price of those units.

Bid and offer prices depend on the performance of the sub-fund(s) and change on a daily basis.

How are unit prices computed?

  • Net asset value

The methodology and how often unit prices are computed vary from sub-fund to sub-fund and is explained in the Product Summary and Policy Contract.

Generally, the fund manager calculates the sub-fund’s net asset value based on a valuation of its underlying assets, after the market closes. After deducting fund management charges from the net asset value, the balance is then divided by the total number of units to derive the unit price. All ILP orders to purchase or sell units are settled based on the next computed unit price (next business day’s price), sometimes referred to as forward price.

Can you invest with your CPF savings?

You can use your CPF savings if the ILP is included under the CPF Investment Scheme. Since January 2001, only single premium policies have been allowed under the CPF Investment Scheme. However, CPF members who have purchased regular premium policies prior to 2001 can continue to have the regular premiums paid from their CPF savings. For more information, please refer to the CPF Board website.

Are ILPs suitable for older people?

You may not need life insurance if you do not have any dependants, e.g. your children have grown up and you and your spouse have adequate savings.

If you are considering an ILP, do think about whether you can keep up with the premiums if you no longer earn an income. Also, ILPs are better suited for consumers with a longer investment horizon to ride out market fluctuations and defray initial costs which can seriously limit short term potential returns. There may be other investment options that could better suit your needs.

Similarly, if insurance protection is a significant objective, but coverage is required only for a limited period, there could be other insurance options you should consider.

Keeping track of your ILP

Your insurer will send you a statement, at least once a year. This statement shows the value of units in the policy, transactions for the period and charges paid through the sale of units. Make sure you review this statement to check if the ILP and sub-fund(s) selected continue to suit your needs. Seek advice if your circumstances and what you need have changed.

 

The above information is prepared in collaboration with the Central Provident Fund Board and Life Insurance Association of Singapore.