Investment-linked policies (ILPs) are a controversial topic when it comes to financial planning. Many of its detractors believe investment and insurance should be kept separate, for they are individual products serving very different purposes.
Yet, ILPs continue to be popular among buyers and have become a mainstay of any insurer's suite of products.
The controversy lies in the way ILPs are structured. On the surface, ILPs are designed to give you an investment product with insurance components, offering the “best of both worlds” benefits to policyholders. Some ILPs provide very little insurance coverage, with death benefit as the only coverage. As such, these ILPs are focused mainly on investment, with very little insurance charges.
This may not sit well with some investors, who prefer to keep their investments separate from insurance plans.
Like any investment or financial product, ILPs have their positives and negatives. That said, let's delve into the pros and cons of getting an ILP.
The case against ILPs
ILP is an insurance product that invests your money in ILP sub-funds while providing insurance coverage.
There is a range of ILP sub-funds to choose from, catering to different investment objectives, risk profiles and time horizons. Some of the units in these ILP sub-funds are then sold to service the insurance portion of the ILP.
And as you age, your insurance charges go up. If your ILP sub-funds do not perform well enough to cover the cost of insurance, you may need to top up the premium portion of your policy or reduce the insurance coverage portion of your ILP; if not, the policy will lapse.
Like any other financial investment product, an ILP carries investment risk, which does not provide guaranteed returns. That means the value of your investments will fluctuate according to market conditions, and you may incur losses if you choose to surrender your policy ahead of maturity.
If you have a conservative risk appetite, it is wiser to choose a traditional life insurance policy that offers some guaranteed cash values, over an ILP.
Unlike a typical insurance plan or direct investment, an ILP comprises ILP sub-funds that are managed by professional fund managers and this incurs a fund management charge.
The case for ILPs
While ILPs combine both insurance and investment elements, each product comes with varying proportions of both components. Some products focus mainly on insurance and come with more insurance coverage, providing a high sum assured; while others focus on wealth accumulation and investment, with very little insurance coverage and few options to adjust the coverage.
A key selling point of ILPs is its ability to generate potential substantial returns. It could be used as a tool to generate potential passive income for one's future investment goals. For example, a working parent may purchase an ILP with a 20-year investment period as a way to provide for his child's education. He can make withdrawals on the ILP to fund his child's university fees.
An ILP allows you to make changes to your portfolio of ILP sub-funds in line with your financial goals. Bear in mind that some ILPs charge a fee when you apply to switch ILP sub-funds, while others offer a limited number of switching for free.
ILPs also offer premium holidays — if you need cash for more urgent matters, you can take some time off from paying the monthly premium, without the entire policy lapsing. During this break, the policy will continue selling units from the ILP sub-funds to maintain the ILP's insurance component. Note that the absence of premiums will impact your policy value, as no new premiums are being invested during a premium holiday.
ILPs offer flexibility when it comes to adjusting your insurance coverage. If you are at important milestones in your life, such as marriage or having a baby, your responsibilities grow together with your liabilities. You have the choice to increase your sum assured for better protection for your loved ones.
On the other hand, you can reduce your insurance coverage by choosing to hold more units in your chosen ILP sub-funds. With an ILP, you can also increase your insurance coverage without having to switch to a new policy. But this applies mostly to ILPs with a stronger protection component, not ILPs that focus on wealth accumulation.
An additional benefit of ILPs is the issuance of welcome or loyalty bonuses. The bonuses are issued at periodic intervals and are meant to boost the value of the ILP, and contributing to higher partial withdrawals should you choose to make them.
How do bonuses boost ILP's strength?
AXA understands the frustrations that could arise with an ILP, particularly the higher fees and investment risks.
Its AXA Wealth Accelerate (AWA) ILP aims to address these frustrations: By distributing bonuses at periodic intervals and even after the policy's investment period, the ILP can potentially offset higher fees and mitigate investment risks.
AWA offers three types of bonuses that are given according to the Minimum Investment Period (MIP) selected, namely the Start-up Bonus, the Power-up Bonus and the Loyalty Bonus. These bonuses not only boost the value of your ILP, but it also helps to offset some of the costs of maintaining an ILP and assist in preserving your investments during bearish conditions.
For example, the Start-up Bonus offers you a cumulative 200 per cent bonus rate, paid over the first five years of an AWA policy, if you have opted for the MIP of 30 years.
In Year 1 of a 30-year MIP policy, the policyholder receives 30 per cent of his or her premium in Start-up Bonus. He or she receives another 40 per cent of the Start-up Bonus for each year from Year 2 to Year 4. In Year 5, the policyholder will receive 50 per cent of the Start-up Bonus. That adds up to a total of 200 per cent in cumulative terms, meaning for each dollar he has invested into the policy, AXA would have contributed two dollars into the same policy.
The next bonus offered by AWA is the Power-Up Bonus. The policyholder receives a Power-Up Bonus every month from the first policy month of the 15th year onwards. This bonus applies only to policies with 20 to 30 year MIPs.
From the 15th year onwards, policyholders who have selected the 30 years MIP, and who contribute annual premiums of lower than $9,600, receive 1.25 per cent of the prevailing total account value back each month, while those who have annual premiums of more than $9,600 receive 1.3 per cent.
Finally, there is the Loyalty Bonus, which rewards long-term AWA policyholders.
Starting from the first policy month after the end of the MIP, and while the policy is in force, you will receive a Loyalty Bonus every month until age 99, for as long as the policy remains in force. For example, a policyholder with an MIP of 15 years will receive 0.20 per cent per annum of the prevailing total account value every month for the same time frame, after the end of the MIP. This means that the policyholder will receive 0.2 per cent of the prevailing total account value at the end of the investment period.
The bonus rate increases to 1.1 per cent of the total account value for MIP of 30 years. This means that the bonus rate, which is the percentage amount of the total account value, increases from 0.2 per cent for a 15-year MIP, to 1.1 per cent for a 30-year MIP.
AWA also offers policyholders the chance to increase their investments when finances allow them to do so. This can be done through the Recurring Single Premium (“RSP”) of a minimum of $100 a month or the lump-sum Top-Up Premium starting from $5,000. These additions can be made on an ad-hoc basis at any time while the policy is still in force, except during the Premium Holiday Period.
AWA enables policyholders to exercise flexibility, allowing them to cash out, reduce premiums or take premium holidays depending on life stages and market conditions. With AWA, you can make use of the extra cash from drawing down on the bonuses to meet your life goals.
Apart from the bonuses, AWA offers the Death Benefit free of insurance charges. For example, the named beneficiary receives 101 per cent of the total account value plus 15 per cent of the total account value, minus Top-ups (if any) and RSPs (if any) that are less than any of the outstanding fees and charges upon death occurring before the Policy Anniversary nearest to the Life Assured's 66th birthday. AWA works mainly as an investment product, with basic insurance coverage to help ensure that policyholders' loved ones can continue to live on.