Looking for investment-linked insurance protection? Investment-linked insurance policies (ILPs) are types of insurance that include both investment and life insurance components.

Units in one or more of the sub-funds of your choice are purchased with your premiums. While the remaining units are invested, some of the ones that were bought are later sold to cover insurance and other costs.

In the case of death or, if covered, total and permanent incapacity, ILPs offer insurance protection (TPD). The sum assured or the value of the units in the sub-fund at that time, or some mix of the two, depending on the policy, may make up the death or TPD benefit.

Why should you invest in ILPs?

Because of their versatility, ILPs are valued by some customers.

If your financial needs change, you can alter your investments by switching sub-funds. You can also add to your investments and remove a portion of your money.

The majority of ILPs with regular premiums provide you the freedom to change the insurance coverage as your needs alter. The coverage, for instance, may be increased or decreased (subject to a minimum sum assured) (subject to underwriting).

But an ILP might not be the best option for you if all you care about is receiving insurance coverage.

Different ILPs

ILPs fall into one of two categories:

  • ILPs with a single premium — You pay a single premium to purchase units in a sub-fund. Most single premium ILPs offer less insurance coverage than ILPs with monthly premiums.
  • ILPs with regular premium payments require ongoing premium payments. You might be able to change the amount of insurance coverage you require with regular premium ILPs.

How the investment part function?

The investing strategy of an ILP will be influenced by the sub-funds you choose. In contrast, the insurer chooses the investment plan for whole life and endowment policies.

An insurer will usually provide you with a selection of sub-funds to choose from, so it’s important that you understand the sub-investing fund’s strategy and approach as well as any potential risks.

What happens with the insurance part

While you continue to pay the same monthly payment for the duration of the policy, insurance costs normally rise each year (as you get older the risk of death, disability, and illness increases). This is true even if your coverage remains the same (i.e. sum assured).

This implies that more units might be sold to cover the insurance costs, leaving fewer units for your policy’s cash value to accrue.

The value of your units could not be sufficient to cover the insurance costs if you have high insurance coverage combined with a sub-fund that performs poorly. Either increase your premium further or decrease your coverage.

How to decide if an ILP is right for you

ILPs are better suitable for investors with a longer investment horizon since they can withstand market swings and cover initial costs, which can severely constrict prospective profits over the near term.

Different ILPs have different insurance policies. Some let you choose the level of insurance coverage you want, while others are more investment-focused and offer very little insurance coverage. Be aware that as your coverage increases, more units will be required to pay for it, leaving fewer units available for investment.

Do take into account your ability to continue paying the premiums in the event that you lose your job.