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.
- 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 |
|
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 |
|
Premium allocation rate (PA rate) |
|
Bid-offer spread |
|
Fund switching 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.
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 |
Annual premium of $1,200 is paid. |
Allocation of premium |
Year 1 Allocation Rate: 15%. This means that:
|
Purchasing units |
|
Selling units to cover charges |
|
Note: In the above example, the number of units is rounded to nearest whole number.
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.
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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Guide to types of life insurance
Life insurance: Comparing term and bundled products Understanding term insurance Understanding whole life insurance Understanding endowment insurance Participating versus non-participating policies Understanding investment-linked insurance policies Investment-linked policies: Guide to fees and pricing Investment-linked versus participating life insurance policies Understanding annuities