Investment Linked Policies: Guide To Fees And Pricing

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)
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.

In a front-end loaded policy, most of the premiums will pay for the insurer's expense 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%.

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.

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.

Understanding Insurance

Insurance can be a safeguard against financial loss. Get an overview on the types of insurance and understand the difference between life, health and general insurance.