What we should know about investment-linked policies
I am shopping around for an insurance policy and was toying with the idea of buying an investment-linked policy (ILP).
ILPs has often been touted of being more flexible, having more investment choices and also potentially giving higher returns, if you hold it long enough, that is.
One of the first things we should be aware of when buying an insurance policy is our affordability. There have been cases where friends have bought insurance policies when approached but dropped it when financials became tight. This not only causes loses to the policy holder, but also lost of coverage, especially in times of need.
The next thing we should be equally aware of is the objective in buying an ILP. Is it for insurance or for investment? More importantly, do we know the implications for either of the objective?
Buying an ILP for insurance purposes is great. It is able to provide you with the maximum coverage for a relatively smaller premium compared to a traditional policy. However, this may mean that we will have to continue paying premiums throughout our life, especially when insurance charges go up with our age and the investment portion is not substantial enough to cover the charges.
In the event that we have investment on our minds when purchasing an ILP, then we have to be mindful and ask ourselves – is there an alternative to this investment form? There are charges that apply to an ILP – insurance charges, policy fees, proportion of funds invested, type of funds invested in, fund performance, component of funds, etc. These charges, especially insurance charges are beyond the policy holders’ control as t is entirely up to the insurer to revise it according to the current situation. In the end, the investment gains may not be much.
My personal rationale in buying an ILP is to have the insurance portion mainly and the investment portion is just a bonus. I am also prepared to top-up the premiums when needed, or when I want to prepare myself for retirement and put this money in, in case I do not have the luxury of it when I retire. This additional portion will be pumped into the investment portion so that in later years, this will help in the insurance portion. There is also a plan to increase my monthly premiums paid as I grow older, so that the coverage will still be there when I am no longer insurable.
While some may say that buying an insurance policy is best left to the agent/ bank, I personally think that we should have some knowledge about it and not rush into it blindly, hoping that all will be taken care of in the end. I have to admit that in order to know something about it, there is quite a bit of time taken to read and understand it. But the effort will pay off when we jump in with both feet and our eyes open.
So, if you are not going anywhere for the holidays, why not read up and think about getting yourself or a loved one an insurance policy as a gift? It is well worth it.
Have a Merry Christmas everyone!
