An Investment Linked Policy (ILP) is a hybrid product consisting of two different components – insurance and unit trust funds. ILPs are more affordable, especially for those in their 20s and early 30s.
They are gaining popularity as you can mix-and-match different types of insurance that offer a sum assured for death, disability, illness, accident and hospitalisation with the life insurer’s unit trust funds to create your ideal insurance policy.
This article is meant to be educational. It is not a fault-finding article to either downplay or discredit any insurance agent.
It may not be practical for agents to make lengthy technical presentations on how an ILP works to most of their clients.
1. Your premium is fixed but your insurance charges are not
ILP policyholders know that their premiums are fixed. But not many of them know that their actual insurance costs are not fixed and will increase as you age.
Let’s say you buy an ILP in your 20s. Your actual insurance cost is low. Thus, a large portion of your premium will be allocated to your unit trust fund. Hopefully, it will grow in value over time.
30 years later, you are now in your 50s. Your insurance cost has gone up, exceeding your “fixed ILP premium”.
How do you cover the shortfall? It will be taken from the current investment value of your unit trust fund.
Hence, despite a rise in actual insurance cost, you will maintain your fixed ILP premium.
2. What if your unit trust funds have been fully exhausted?
Poor investment results from your unit trust fund or substantial hikes in insurance costs can wipe out all of your investment value.
Will your ILP be terminated if this happens?
Your life insurer will demand a top-up premium. If you agree to make the extra payment then all is well. The ILP will continue to be in force. Otherwise, your ILP will be terminated.
3. Minimum Allocation Ratio (MAR)
Effective July 1, 2019 BNM implemented a change to ILPs in regard to the MAR. Your ILP premium will be categorised into allocated premium and unallocated premium.
Prior to July 1, 2019 the minimum proportion allowed for allocated premium or MAR from your ILP premium was as follows:
Effective July 1, 2019, the MAR from your ILP premium will be as follows:
In short, for every RM1, 000 in ILP premium you pay, your life insurance company will have:
As such, ILPs purchased after July 1, 2019 will be more expensive than ILPs purchased earlier.
4. An option to increase your sum assured
If you have an existing ILP purchased before July 1, 2019 you have two options to increase your sum assured or to add-on critical illnesses, a medical card or personal accident insurance.
You can buy a new ILP, but this will be costly due to the BNM changes.
You can consider increasing the sum assured in your existing ILP. It may be cheaper as your additional premium will follow the new BNM MAR.
It’s best to compare the two options to find what is suitable for you.
5. How to get the highest sum assured at the lowest premium
Insurance agents use a software to generate quotations for you.
Here’s a hack to get the best insurance deal. Your agent proposes an ILP, where the premium is RM150 a month with a sum assured of RM250, 000.
There are two ways to get a better deal:
Get your agent to increase the sum assured to RM300, 000. The software is able to generate a quotation where the premium is still RM150 a month but the sum assured is raised to RM300, 000.
If that is the case, raise it to RM350, 000 or a higher sum where the software is unable to churn out a quotation.
Let’s say, the software stops generating a quotation at RM350, 000. You then lower it down to RM345, 000, RM340, 000 – until you reach a comfortable figure.
Most likely, you will end up with a sum assured which is a lot higher than the original RM250, 000.
Choose this if your intended sum assured is the RM250, 000 your agent proposed.
Get your agent to reduce the premium to RM120 a month. If the software is unable to generate the quotation, then increase the premium to RM130 and RM140 a month.
Let’s say you can get the policy for RM 130 a month. This means you save RM20 a month, which is 13% of the original premium.
This article first appeared in kclau.com
Ian Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia.