3 Reasons why Singaporeans buy investment-linked insurance policies
Ever be confusing about choosing between ice cream and brownies? Both options are equally tempting, yet you just get to pick one for the sake of your pocket and limited gastric capacity. At times like these, don’t you wish you could have the best of both worlds?
Well, in the investment world, investment-linked insurance policies give you the best of both worlds. They are a cross between your traditional insurance policy and investment components. Influential investors have come up with mixed reviews for this financial product. But nonetheless, there are many people who buy investment-linked insurance policies and make the best of it.
The main focus of this article is to understand why Singaporeans buy investment-linked insurance policies. But before that, let’s define investment-linked insurance policies.
What are investment-linked insurance policies?
In Singapore, there are many financial services company that offer investment-linked insurance policies to customers. Some of them are Tokio Marine Singapore, Generali Worldwide, and AIA Singapore to name a few.
When you purchase an investment-linked insurance policy, the premiums you pay give you insurance coverage and a part of it is used to buy units in a specific investment fund of your choice. There are two main types of investment-linked insurance products – Single Premium and Regular Premium.
The MoneySense website describes these two types of insurance policies in the following way:
Single Premium ILPs:
You pay a lump sum premium to buy units in a sub-fund. Most single premium ILPs provide lower insurance protection than regular premiums ILPs.
Regular Premium ILPs:
You pay premiums on an ongoing basis. Regular premium ILPs may allow you to vary the level of insurance coverage you need.
Now that we know what ILPs are, let’s move onto why Singaporeans should consider buying these hybrid insurance policies.
Reasons for buying investment-linked insurance policies
Flexibility in insurance coverage
The best part about investment-linked insurance policies is that they provide you with the flexibility to vary your investment mix with your insurance coverage. This means you will get to adjust your insurance coverage with time depending on your requirement.
In a typical investment-linked insurance policy, your premiums will be used to purchase some units of your insurance coverage and some of them are sold to pay for the charges of insurance. Increasing your insurance coverage, then, is a matter of setting aside more units to cover the higher cost of insurance. But the downside of this move is that it will affect your final returns. It is, therefore, up to you to prioritize the number of units you want to allot for your investment as opposed to your insurance coverage.
Better potential for higher returns
When compared to other insurance policies, you’ve probably noticed that an ILP offers higher projected returns. Most likely, you heard about it from your insurance agent. This is not an exaggeration or some kind of marketing tactic; ILPs really can give you high returns for the amount you invest.
This is because when you buy an ILP, you are dealing directly with the market (through the appointed fund managers). You see, the premiums you pay each month are used to buy units in a fund. These units are then held on your behalf until you decide to redeem them – i.e., sell them off in return for cash.
Depending on market forces, the performance of the fund, and the time you choose to redeem your units, you could end up receiving a larger payout than from, say, an endowment fund held for the same period. If this is so, you’ll have achieved a higher return.
However, just because an ILP gives you higher returns than other plans, that doesn’t make it automatically superior. The true test lies in how much higher your total payout is, in comparison with how much you have put in.
Consider that in an economic downturn, an ILP that showed a higher rate of return on paper could still barely break even in real terms.
Ability to temporarily stop premium payments
Another advantage offered by ILPs is the ability to temporarily stop your premium payments, which is useful if you are in between changing jobs or need to divert your funds to other more demanding financial commitments.
During a premium holiday, your existing units are used to pay for the cost of insurance, as well as any other fees involved in the upkeep of your policy. Hence, you can only opt for a premium holiday if you have enough units to sustain the upkeep.
With a premium holiday, your ILP is kept in force. This is different from other policies, whereby stopping your premiums will result in your policy being terminated – at a huge financial cost to you.
These are the three most attractive reasons for Singaporeans to buy investment-linked insurance products. If you are purist, then maybe ILPs are not your thing. But if you want to make your investments work harder, then investment-linked insurance policies could prove to be a good fit for your financial profile.
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