Can Insurance Be A Tool For Investment? (2018 Update)
KEYWORD PHRASES: Insurance investment products
People are usually attracted to idea of growing their wealth with the help of their limited earnings. This is why they tend to have a positive outlook towards investments. But when it comes to insurances, everybody associates it with all the unfortunate incidents in life like death, critical illness, and accidents. Talking about insurance is never a good idea in a social gathering, as it makes everyone morose.
But this is slowly changing. Financial planners are even trying to use insurance as an investment tool. They try to seek out the best of both worlds for consumers by linking investments with their insurance policy. Products like Investment-Linked Insurances Policy (ILP) have both insurance as well as investment components. It’s important to note that both insurance and investments are crucial for your financial profile. You need investments to increase your wealth, for better lifestyle, and for a comfortable life post-retirement. On the other hand, as you go through various stages of life, the number of dependent people increase. The right insurance policies will ensure that your family is financially stable even if you are not around. But is it a financially viable option to combine investments with insurance coverage? The answer depends on your financial goals and risk tolerance.
Here is a brief overview of Investment-linked Insurance Policies in Singapore, their potential benefits and the risks involved.
What are Investment-linked Insurance Policies?
According to MoneySense, a National Financial Education Programme for Singapore, Investment-linked insurances policies (ILPs) have both life insurance and investment components. The policy requires you to pay for units for sub-funds of your choice. A part of the premiums you pay is used for investing in these sub-funds whereas the remaining amount is used to pay for insurance coverage.
ILPs provide insurances protection in the event of unfortunate events like death, motor-vehicle accident, critical illness, total or permanent disability (TPD), etc. Depending on the policy, the death or TPD benefit may comprise the higher of the sum assured or value of ILP units or some combination of the sum assured and the value of ILP units. The money you get depends on the value of the units at that time.
ILPs are ideal for those who have a strong inclination towards investments as opposed to getting an insurance policy. It provides a way for the investor to be happy about getting to invest in the sub-funds of her choice and at the same time gives the satisfaction of having insurance coverage. However, if your priority is for a stronger insurance coverage, then you should consider other insurance products that are not linked to investments.
The MoneySense website classifies ILPs into two major categories:
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.
The benefits of insurance investment products
One of the key benefits of linking investment with insurances is that you get to enjoy potential returns as well as life protection at the same time. To add to that, there is a wide range of sub-funds to choose from. You can opt for sub-funds that adhere to your risk-tolerance. And some financial advisors also allow you to switch your sub-funds after charging you a nominal fee. You also get the flexibility to vary your investment mix and insurance coverage based on your evolving financial needs.
Investors may optimize the returns with the help of professional fund management knowledge provided by renowned investment advisors. And the cherry on the cake is that it is exempt for all estate duties.
The risks and pitfalls of insurance investment products
One of the main downsides of linking insurances with investment is that the value of your investment is directly linked to the movement of the market, and the risks are higher. So, if the market is at all time low, your investments will go down. Although even the opposite is possible, the risk involved in ILPs is much higher. Another disadvantage of using ILPs is that the units you purchase could be insufficient to cover your insurance fees. ILPs are also known to have high sales charges. In most cases, you will end up paying a huge incentive to your financial agent. As per a report by Dollar and Sense, this incentive can be atleast worth the premium you pay for one year.
The reason for high sales charges could be your growing age and a steep fall in your immunity. Therefore, insurance companies label you as a riskier client. To lessen this risk, insurance companies ask for higher fees for older policyholders – even if you keep the same coverage.
This means that every year, even if you are paying the same amount of money for your policy, your premiums can buy fewer investment units to pay for your higher-costing insurance charge.
This is especially risky for those whose accounts combine a high insurance coverage and a sub-fund that isn’t performing well because the cash value may not be enough to pay for the life insurance’s coverage charges. To fix this, you may either raise your premium payment or lessen the insurance coverage.
The final verdict
When planning to invest in anything, remember to take time to study and understand what you are deploying your money to.
Now if you ask whether insurances can be a tool for investment? The answer is yes, but just like a regular investment option, your insurance linked investment policy involves high risk. So, if you’re up for it, indeed go for it.
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