Martin Lee @ Sg
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Life Policies including Investment-Linked Plans

In this My Money seminar held in July 2009, there was a talk on Life Insurance Policies and Investment-Linked Policies.

Following are some points from the session which covered on the basic types of life insurance and the considerations to be made when deciding which is more suitable for yourself.

The basic types of life insurance consists of two forms: Traditional types which includes Whole Life, Term and Endowment. The other type is Investment-linked Policy (ILP).

Traditional life policies are further divided into non-participating policy and participating policy. As the name suggests, non-participating policies do not participate in profits of the insurer’s life fund i.e. the insured is not entitled to bonus payment. Participating policies on the other hand participate in the profits in the insurer’s life fund where bonuses are not guaranteed. (Refer to the MoneySense guide on participating plans)

Whole life is a form of permanent insurance policy providing coverage for the entire life of the insured. Premiums can be paid throughout the insured’s life or payment for a limited period. (i.e 15, 20 or 25 years.) After this period of time, there is no need for further payment but you are covered for the whole of your life. The death benefit is paid out upon death/total and permanent disability whereby the policy would be terminated once the death benefit is paid out or upon cessation of the policy where there is a surrender value, whichever is earlier.

Term insurance is a form of temporary insurance where coverage is provided for a specified period of time. There is no surrender value as compared to whole life policy, in this scenario the insured is paying purely for the protection and there is no cash value for the policy.

Endowment is a form of temporary insurance providing coverage for a specified time period only (known as the policy term.) A maturity benefit would be paid upon maturity of the policy. Should the insured dies during policy term, then the death benefit will be paid.

Investment-linked insurance policy is a life insurance policy which provides both a combination of protection and investment. There are different plans that can cover for either the whole of life or a specified time period only.

Certain charges to take note of include Bid-Offer spread, fund management fees, insurance coverage charges, policy fees, surrender charges, premium holiday charges as well as fund switching fees. The value of ILP depends on the performance of your chosen funds and do not have attaching bonuses.

An ILP comes attached with certain risks:

  • Policy value will fluctuates according to the performance of the underlying funds.
  • Policy owner may be exposed to higher investment risks to achieve higher potential yield.
  • Investment returns are not guaranteed
  • Potential risk of losing capital invested
  • Insurance coverage charges are not guaranteed
  • Units may be insufficient to pay the insurance coverage charges if performance of underlying funds are very poor.

Thus, an ILP might not be suitable for someone with a short time horizon or low risk appetite. (Refer to the MoneySense guide on ILP)

Different policies cater to different individual needs. At the end of the day, you need to know your needs and objectives before you can decide what kinds of insurance plans are most suitable for you.

You might also want to refer to the MoneySense guide on life insurance.

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