Investment-Linked vs Traditional Life Insurance: Which One Is Right for You?30 Apr 2021
An investment-linked plan (ILP) is a 2-in-1 life insurance policy that combines protection and investment. The premiums that you pay provide you not only with life insurance cover but part of the premiums will also be invested in specific investment funds of your choice that suit your risk appetite. This helps your account value to grow and ride out market volatility with partial & top up features. Hence, ILPs have become popular over the years, and is now a mainstay in the product portfolio of many insurance providers.
Meanwhile, traditional life insurance plan is offered at a premium that remains the same for your entire policy term, with a guaranteed amount at end of the policy term and build up "cash value". Traditional Life insurance plans provide the sum assured and a guaranteed or a vested bonus at maturity. It once was the most common type of life insurance and has retained its appeal for many people because of its simplicity.
But which plan is right for you? To help you decide, here are some key points to consider:
1. Your risk appetite
ILPs offer a benefit called a cash value (investment account value), which comes from the premiums that are used to purchase units in selected funds for investment. The amount is accumulated over time and can be withdrawn during the policy term, cashed out when the policy matures or when it is cancelled.
However, like other financial investments, ILPs come with investment risks, which means returns are not guaranteed as the value of investments will fluctuate according to market conditions. This can be a problem if your risk appetite is low.
A traditional life insurance plan comes with a cash value. But the difference here is that the amount is guaranteed, making this a more secure option. The premium allocation that goes into the cash value pool is fixed, built up over the years and paid out in full once the plan matures.
2. Premiums and level of coverage
With ILPs, you typically start off with low premiums. But over time, you may need to top up your premiums to purchase more units to invest, due to the rise in insurance charges as you get older.
Insurance charges are paid by selling off your units. As the charges increase over the years, more units will be sold off, leaving less available for investment.
This won’t be a problem if your investments have been doing well, as the compounding returns from the early years will be enough to offset the additional charges while still continuing to grow. But if your investments have been doing poorly, and you choose not to increase your premiums, you’ll have to reduce your insurance coverage, as the value in the units you own will no longer be enough to cover your insurance cost.
With traditional life insurance, this isn’t typically an issue, as the premiums paid are higher compared to ILPs, which helps to offset the rising insurance charges.
As mentioned above, an ILP can potentially be a source of passive income. This comes in the form of the policy’s cash value (investment account value), which we talked about earlier.
If your selected funds perform well, and once the cash value(investment account value) has grown into a sizable amount, you can opt to make use of your earnings to pay your premiums, make a purchase, cover unexpected costs, or even to grow your retirement fund.
Unlike traditional life insurance, where you can only access the cash value at the end of the policy’s term, you can withdraw from your ILP’s cash value(investment account value) whenever you need financial aid provided you maintain the minimum value required in your policy.
4. Premium allocation
For ILPs, your premiums are allocated differently for the first 7 (seven) years. During this period, portions of it are used to cover administrative and distribution costs, and the rest are used to purchase units for investment. After this period, 100% of your premiums go towards buying investment units.
5. Premium holidays
With ILPs, you can opt for a premium “holiday”, a feature which can be useful if you’re between jobs or you need to temporarily allocate your money towards other needs. During this break, your ILP will be kept in force by selling existing fund units to continue paying for insurance coverage.
In Traditional Life Insurance policies— an optional provision called Automatic Premium Loan (APL) that authorizes the insurer to pay from the cash value any premium due at the end of the grace period. This provision are most commonly associated with cash value life insurance policies and allow a policy to continue to be in force rather than lapsing due to non-payment of the premium. APL is still a loan and, as such, does carry an interest rate charge.
ILPs and traditional life insurance function differently and each has its own benefits. What matters most is that you choose the type that fits your risk appetite, budget and financial goals.
Take a look at our range of life insurance plans here. Our Gibraltar BSN Agents can also provide more insights to help you make an informed decision. If you’d like us to get in touch, simply leave your details here.