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Investment-Linked Product (ILP): What Is It and Is It Suitable For Me?

When’s the last time you’ve actually asked yourself, “Am I financially secure?”

Setting a number of short-term, middle-term, and long-term financial goals is a crucial step towards achieving financial security. If you aren’t making and following up on such goals you are likely to end up spending more than you should and upset your precious bank accounts.

The life you have planned for yourself and your loved ones must proceed in the best way possible should anything happen to you. Take control to ensure that your plans and legacy will remain unaffected!

Which brings us to the topic of Investment-linked products (ILP) today. Let the Bear shed some light on this topic here.

What is an Investment-Linked Product (ILP)?

Don’t be daunted by the big words! An Investment-Linked Product (or ILP in short) is a two-in-one instrument that combines investment and protection. The premium/contribution that you pay will go towards life insurance/Takaful cover as well as to be invested into investment funds of your choice.

ILP’s investment component meanwhile, is divided into units of equal value. Interested in finding out how well these units perform? You can visit LIAM’s website or your insurer or Takaful operator of choice to follow up on their monthly performance.

Types of ILPs: Single-Premium/Contribution Plan vs Regular-Premium/Contribution Plan

Once you’ve decided on getting an ILP, the next step is to find out which premium/contribution paying frequency works for you – do you want to pay the entire premium/contribution at one go (Single-Premium/Contribution plan) or at regular intervals (Regular-Premium/Contribution plan)?

Let your personal needs and preferences help you decide which plan works better for you. Not sure which plan to go with? Here’s how the Bear would consider each of the plans on offer:

Single-Premium Plan

Ali has just completed his first year at his new job and received a year-end bonus of RM3,000. This extra lump sum of money can be placed in an ILP, to complement an existing conventional life insurance or Takaful plan.

Regular-Premium Plan

Kah Wai has finally landed her dream job and is making headways towards adulting. As she budgets her daily and monthly expenses, she has also decided to invest in an ILP to cover her insurance/Takaful needs – and her future.

What are the key rules of ILP?

When you invest in an ILP (or any investment for that matter), you need to make clear and conscious decisions that will determine your health and financial well-being for the coming years.

  • You decide on how to allocate your insurance premiums/Takaful contributions towards protection and investment.
    In the initial period of your ILP policy, the bulk of your premiums/contributions will go towards paying for the insurance/Takaful component. Do keep in mind that the higher your insurance/Takaful coverage, the more units will be required to fund it – leaving you with less units to be invested.
  • You decide on the Sum Assured.
    Should something happen to you at any stage of the policy, your Sum Assured will be paid out immediately regardless of what your investment portion is worth.
  • Your Sum Assured leads the way.
    When your Sum Assured is covered by the value of your investments, all the premiums/contribution you’ve paid will go into your investment component. Likewise, whenever the value of your investment drops below the Sum Assured, part of your premiums/contributions will be channelled to your Insurance policy/Takaful certificate until it reaches the Sum Assured.
  • You can make optional withdrawals.
    An ILP policy allows you to make optional withdrawals from the cash value should you need some form of funding for emergency situations – or even for retirement goals. Do keep in mind that if there is too little fund left in your account, this may cause the policy to lapse due to insurance/tabaruu’ charges increasing as you get older- which brings us to the next subject.

What are the fees and charges you’ll find with ILPs?

Remember how we mentioned that ILP provides a certain degree of flexibility in your investments?

You have the option to switch between funds offered by your Insurance company/Takaful operator. Most companies typically allow one free switch per year, so do use it wisely unless you’re OK to incur additional processing charges.

What are the risks I need to understand with ILPs?

As with almost any investment instrument out there, there are risks you will need to weigh out for your own consideration. Here’s two that you need to pay attention to:

1. Your ROIs are not guaranteed

ILPs, like other types of investments are naturally exposed to investment risks. The performance of your chosen funds is not guaranteed; it may turn a profit or make a loss – and you might even get less than what you had initially invested in. What you end up with when you decide to surrender your policy/certificate will depend on what the units are worth at that time.

While you should keep a close eye on your investment performance and peer over yearly reports, keep in mind that the past performance of the investment-linked fund is not an indication of its future performance. The investment risk of the ILP will be borne entirely by you.

2. You may need to reduce your Insurance/Takaful coverage

As we age, our risk of developing illnesses and diseases will rise, leading to the Insurance/Takaful cost to treat them to increase in tandem.

Over time, it is possible that the units bought with the premiums/contribution may no longer be sufficient to cover the Insurance/Takaful costs, leaving you with little to be put into investments. In order to maintain the investment objectives, you may end up reducing your Insurance/Takaful coverage.

Is ILP the right product for me?

Three questions to ask yourself before getting into ILPs:

1. What are your goals?

Depending on your current financial status and life stage, everyone has different financial and investment goals.

Those without dependents for instance, stand to benefit more from a traditional investment fund that is aligned with the financial goals set. Funds with a higher risk profile means that potential returns are higher as well.

On the other hand, basic whole life or term life Insurance/Family Takaful plans will be more beneficial if you’re seeking Insurance/Takaful coverage – especially if your plans include caring for your close family and loved ones.

2. What is your risk appetite?

ILPs are not risk-free products, and as you’ll come across over and over again, the returns are not guaranteed. The value of an ILP will vary, depending on the performance of the investment portion. Of course, the flexibility offered by ILPs means that you can adjust the protection and investment portions based on the risks you’re willing to take on.

If you are targeting a high growth factor on your investments, then please do the due diligence or consult professional advice in ensuring that the funds you are investing in belong to an asset class that can deliver on your expected returns.

Your age also plays a part here. Younger people have time on their side, meaning longer period for investments and the option to choose more aggressive investment funds to fuel their objectives.

3. How much time are you setting aside?

Rome wasn’t built in a day and patience is a virtue. Insurance/Takaful plans in general require a set length of time before you see a return. The nature of Insurance/Takaful products means that they are primarily designed for unforeseen events and it’s no different with ILPs when it comes to unfortunate incidents such as TPD or death.

If you speak to a financial advisor when planning your ILPs, he or she will set an investment time horizon with you to determine your goals as an investor. Let’s say you’re currently 30 years old and you have grand plans to retire when you reach 55; the time horizon for your retirement planning strategy would then be 25 years.

With a time horizon set, you’ll also need to strike a balance between your protection needs and how much premium/contribution you can afford.

New Bank Negara Malaysia guidelines with effect from 1 July 2019: What you need to know

All licensed Insurance and Takaful operators in Malaysia are regulated by Bank Negara Malaysia (BNM) and in recent times, there has been a greater push towards helping more Malaysians understand better the sustainability of the policies they have signed up for.

Hence, beginning 1 July 2019, here’s what consumers and ILP holders need to be aware of:

  • They will be given general information on how ILP and the concept of sustainability works.
    Insurers/Takaful operators will go into greater detail to explain how Investment-linked Products work especially with regards to how premiums/contributions sustain your Insurance/Takaful coverage.
  • For any ILP sold after 1st July, they will automatically be required to pay the amount of premium/contribution expected to sustain their policies/certificates until the end of contract term.
    Insurers/Takaful operators must set premiums/contribution that are expected to be sustainable until the contract term ends by making assessments that are up-to-date and relevant to the specific individual ILP owner.
  • From 2020, they will be provided with annual reports on how long their policies/certificates can sustain with the amount of premiums/contributions.
    This yearly statement is intended to help you stay on top of how long your Insurance/Takaful cover can last based on your current premium/contribution and fund performance. So there’s no reason to panic when you hear from your Insurer/Takaful operator!
  • Bought a policy/certificate before 1 July 2019?
    Rest assured, Insurance/Takaful companies are obligated to send you a pre-lapse notice for ILPs that might lapse in the coming 12 months.

Furthermore, the new regulations have also put in place new rules when it comes to Product Illustrations or Sales Illustrations (PI or SI).

In case you’re wondering, a Product Illustration/Sales Illustration is designed to show interested customers how your cash flows and the impact of relevant fees and charges on cash values at the point of sale to ensure that the decision-making process is made easier for the customer.

  • From 1st Jan 2020, all types of funds must base their illustrations on two rates: 2% and 5%. The columns to pay attention to are ‘Scenario X’ and ‘Scenario Y’ which must now show 2% and 5% respectively.
    Previously, illustrated returns of ILP for fixed income fund stood at 2% and 5%, whereas equity funds were between 4% to 9%.
  • These set rates are to be used to better demonstrate the interactions between the cash flows and manage customer expectations along the way.
    The new estimations will encourage potential consumers to place their focus more on protection instead of investment.

Final Word

Whatever Insurance/Takaful or investment product you decide on, your personal goals need to take top priority. Perfect investments for everyone do not exist, but there are investments that are perfect for you – and just as importantly, aligned to your unique financial goals. This is the top-most highest consideration you need to remember.

Investing in an ILP policy/certificate requires careful evaluation of your own risk appetite, age, and the financial commitment you’re willing to take on. The Bear strongly urges you to take a moment to assess if your ILP can protect you until the end of its term – and what steps you need to line up to ensure it fulfils its objective. Sit down with your family members, beary loved ones – even a financial advisor – and review your long-term goals.

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