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Everything You Need to Know About Investment Link Policy (ILP): A Brief Guide

Updated 30 Aug 2018 – By Contributor - Flynn Chee


What is investment linked policy?

An investment linked policy (ILP) is an insurance plan that has both elements of insurance and investment wrapped in one neat package. It’s usually labelled as a product that can provide both comprehensive protection and attractive returns. One cannot gain anything without sacrificing something, and the same can be said of ILPs. Why is this so?

You see, ILPs bring you a few of the strengths from both investment in unit trusts and traditional life insurance, but in turn sacrifices the guaranteed minimum cash value growth of life insurance and the liquidity of unit trust investment. The insurance company of your choice will manage the investment fund, with the returns credited into the account of the insured.

Since an ILP is completely bound to your funds’ performance, there are only two possible scenarios to expect when choosing this plan. On one hand, if the funds do well, then you’d be earning a pretty penny; on the other hand, beware a sudden market downturn as your stocks could be worth nothing in an instant. We cover more of the basics of ILP in the things you may not have heard from your insurance agent.

Considering how ILP has elements from both unit trust and life insurance, the combined features might confuse people who have understanding of only one product. We’ve provided a breakdown of the key features to take note of:

Terminology Description
Level premium

A form of insurance where the premium does not change during the entire duration of the policy.

The amount of insurance premium is determined by estimating the total insurance charge of the policy holder’s entire life span. Compared to term policies which have rising premium rates, this type of policy will have a higher premium at the beginning of its life but lower towards the end.

Most ILPs use this form as it provides an impression of stability to the policy holder.
Insurance charge

It is determined by considering the amount of coverage, health condition and the attained age of policy holder.

The insurance charge tends to rise with the age of policy holder.

Cash value

It is the net amount of accumulated premium after the deduction of insurance and other distribution charges, as well as administrative expenses.

If your insurance policy is ILP, the cash value will be the net asset value of the units held. It will also depend on the market fluctuation and fund performance.

Premium allocation rates

The percentage of premium allocated to buy units in funds that are linked to the insurance policy. According to the terms and conditions of available ILPs in Malaysia, most of the insurance policies allocate 40% to 45% of the premium to investment purchases at the beginning and increase gradually year by year.

At the end, the allocation to investment will be 100% after the first seven years of the policy.

Fund management charge The charge by a fund manager for the efforts of managing the funds. It is usually around 0.5% to 1.5% per annum.

It may seem like ILP has an amazing combination from both financial products. However, you should still put in the effort to manage your unit trust investments, even though there is a team of professional fund managers helping you. Does combining a unit trust with insurance eliminate the need to manage your investment? The answer is still a big NO! Buying and selling units at the right time is still the key to maximising your returns in a unit trust investment.

To conclude

With the bare basics and common terminologies covered, you’re at least more savvy on this subject matter should you ever be in the market for something that offers both flexibility and control of your own investments. In the second part to this guide, we’ve provided some simple scenarios help to demonstrate the differences between doing nothing and managing the fund in a smart way. 

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