Investment-linked policies: Guide to fees and pricing

4 min. read

Find out about the various fees and charges of investment-linked insurance policies (ILPs), how unit prices are calculated and how much of your premium actually goes towards buying units.

Key takeaways

An ILP's fees and charges include insurance coverage and policy administration charges as well as fund management fees.
Not all of your premium paid may be used to buy units. The proportion used is commonly known as the premium allocation rate.

Fees and charges

You can find the details of all the charges of an investment-linked insurance policy (ILP) in its Product Highlight Sheet (PHS), Product (Fund) Summary and Policy Contract.

The different types of fees and charges are as follows:

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 or administration charges	Fees to cover the 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.
Premium allocation rate (PA rate)	A portion of the premiums you pay may be deducted upfront before the remainder is invested in units of a sub-fund (i.e. a PA rate of 20%, means only $200 of a premium of $1,000 will be used to purchase units). Typically, PA rates will increase year on year until it reaches 100% or more (i.e. an insurer may give bonus units on every premium amount paid). Please see note below for more details.
Bid-offer spread	Insurer sells the units to you at the offer price, and purchases units from you at the bid price. The difference between offer and bid prices is called the spread and it is usually around 5%. The spread pays for distribution costs, marketing and other general administration expenses.
Fund switching charge	Typically, 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?

The full amount of premium paid may not be used to buy units. The proportion used is commonly known as the premium allocation rate and is stated in the Product Summary 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 your premium will be used to buy units (i.e. 2% is provided by the insurer).

Example: Allocation rate for first-year premium

The table 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.
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
Purchasing units Units are purchased at the offer price.	Offer price: $1 Premium allocated: $180 Number of units purchased: 180
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.

Bid and offer prices

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.

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 unit prices are computed

How it is computed and the frequency of computation may vary from sub-fund to sub-fund. Find out more 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.

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