5 Terms You Should Be Aware Of Before Buying An Investment Linked Policy In Singapore Life starts to look a little more peaceful and better when you have it all figured out financially for the future. Today in recent times, where everything seems uncertain, it is critical that you have got yourself covered for the future. One of the best ways to do that is to invest in investment linked policies. An investment linked policy is a hybrid policy that clubs both life protection and investments into one policy. In this policy, the premiums are used to pay for units in one or more sub-funds of your choice. A fraction of these units are then sold to buy insurance while the rest of them remain invested. The policyholders also have the space to adjust their coverage so as to scale their investment nest egg in the later years. This can come in useful particularly for those who want to reduce their life coverage, especially after their children are no longer financially dependent on them.
Since there are many variants of investment linked insurance policies, it is imperative to be aware of the policy-related terms. Here’s a detailed description of them: 1. Single Premium vs. Regular Premiums There are two ways by which you can pay the premiums for ILPs. You can pay for them through regular premiums or through a single premium. For those who opt to pay a single premium, it implies paying a lump-sum at the start of the policy and part of it will go in purchasing units in a sub-fund (i.e. the investment component). These units will be sold on a regular basis to pay for
any coverage (basis the extent of life coverage you choose or the policy provides). In case of regular premiums you can choose to pay the premiums on a monthly or annual basis and the premiums paid are then broken into the components of protection and investment. 2.
Premium Holiday In case of regular premiums, you may have the option to increase or decrease the extent of your coverage or you can get the units to be sold for your protection level. This may give you the flexibility to take premium holidays (i.e. a period of time for which you don’t have to pay the premiums on the policy). In the event of a financial difficulty, you can stop making the payments of your premium. This feature is known as premium holiday and can be useful if you are switching jobs or need funds for a more pressing financial commitment. During a premium holiday, the existing units are used to pay for the cost of insurance along with any other fee that may be involved for the maintenance of the policy. It is important to note that there may be charges applied and you should check with your insurance provider.
3. Sub-funds The investment plan you opt for gives you access to a diverse range of subfunds, hence opening the doorways for you to diversify your investment. Here you get exposure across a wide range of asset categories like fixed interest bonds, equity, property, commodity, and money market. These sub-funds, on an individual level may also be region-specific and sector-specific. It is however critical to keep in mind that you choose the kind of funds that are in line with your ability and your appetite to take on risks.
4. Fees and Charges An ILP consists of certain fees and charges and it is quite important to understand them. For example, you may have to pay an administrative fee that the insurance provider charges for the maintenance of the policy. Another charge that you may have to pay is the cost of insurance for the protection component. Then comes the redemption fee or the surrender fee that may be charged for full or partial sale of the units.
5. Fund Switching Your risk appetite may change due to a shift in your stage of life or for other reasons, and you may want to shell your investments out of riskier funds and put them into less dicey funds. You may also observe that the sub-fund that you have invested in is not giving the level of expected returns or has altered its exposure to the companies that you are not big on investing in. Also, when you switch sub-funds, you usually have to pay a redemption fee along with a sales charge. In conclusion, the terms related to an investment linked policy may seem a bit puzzling to many first timers, but it pays to spend some time garnering an understanding of them. For further information or guidance, do speak with a financial consultant today.