Investment-Linked Products – The Pros and Cons

Investment-linked products – what are the pros and cons? Is it true that consumers get the best of both worlds by having their life insurance coverage and investments managed for them? Or, is it better to invest separately and stick to regular life insurance? As consumers, we have to consider the pros and cons before committing to a plan.

Before we delve deeper, we have to first understand what are investment-linked products or in short, ILPs.

Investment-linked products are the hybrid of life insurance and investment plan. In other words, it means you’re protected under insurance coverage, and at the same time, you are allocating your money for an investment plan that helps you grow your wealth.

However, as with all investments, it is best to practice due diligence before committing to anything – no matter how good they sound on paper. Apart from understanding the product or potential investment vehicle well, weigh the pros and cons first. Then, decide if it suits your needs and appeal to your risk appetite.

The Pros

Flexibility

Unlike most of the investment plans, investment-linked products provide higher flexibility in allocating your money. To suit your affordability, you can customise or change your insurance coverage and premium amount. You’re also allowed to top up your investment, make withdrawals, and switch funds based on your needs.

What happens when a time comes where you find yourself in a financial pinch, and you are unable to pay? That’s when a feature called premium holiday kicks in. With a premium holiday, you have the flexibility of continuing your plan even without paying into it. Remember the investment aspect of your ILP? Yes, the funds from your investments will pay it on your behalf.

However, do bear in mind that by selling your funds to pay for the premium holiday period, you are essentially reducing the units of funds in your account. You need to ensure that you have enough funds to sustain any further charges to prevent your policy from lapsing.

Choice of funds

Before you choose an investment-linked fund, always seek advice, analyze your financial goal, and evaluate potential risks. You can choose from a wide range of investment funds that are low, medium or high risk. Although these funds are managed by professional fund managers, it is not a fool-proof and risk-free approach of investing. The returns are still dependent on market conditions and economic factors. It is best to do your own research and clarify with your financial adviser based on your needs and risk appetite before signing up.

Potential Returns

Earn potential higher returns in the long run and enjoy the benefits of any growth in the value of the unit that has been allocated to you. Again, this depends on the type of funds invested, and its performance against market conditions. The keyword here is potential and there’s no guarantee on ROI.

Now, the cons.

Now that we’ve gone through the advantages, let’s look at the flip side of the coin.

Returns on investment are not guaranteed

As mentioned, your investment is heavily and directly affected by market conditions. As a result, the performance of the funds and returns of investment are not guaranteed. This risk is also something you have to take into consideration.

Reduce of insurance coverage

When humans age, we’re exposed to a higher risk of death, disability, and illness. Hence, the premium of insurance coverage will also increase as you age. In this situation, the premium you pay may not be enough for both insurance coverage and investment. To exercise your flexible right, you will need to increase your insurance coverage and reduce your investment fund allocation or vice versa.

Conclusion…

Should I go for an investment-linked product?

Yes – if you do not mind paying fees and charges for having your investments managed for you. This is great for people who prefer a “Done-for-you” approach. You also get to retain the flexibility you desire, on top of having life insurance bundled with medical and personal accident coverage. This is commonly found in many ILPs sold today in the market.

However, if fund management fees and other charges involved are a concern to you, consider this. You might generate higher returns by investing your funds in other instruments instead of an ILP – provided that you are:

  1. Comfortable doing it yourself (DIY investor)
  2. A seasoned investor or at least informed enough

Then yes, an ILP may not be your best bet at making tonnes of money as an investment. You’re better off investing elsewhere.

All in all, when buying into an ILP, it is best to look at it at both angles – the coverage and the investment returns. There will be a time where one will outweigh the other – an increase in coverage and reduce in fund or vice versa. So, be prepared for that.

Or you can choose the traditional method of buying a term or whole life insurance and invest your funds elsewhere depending on your needs. There’s no hard and fast rule, and it all boils down to the individual.

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