Insights

What is an Investment-Linked Policy (ILP) and is it suitable for me?

31 July 2023 | 3-mins read

Sit back, relax, and let’s enjoy a short trailer of the state of the world in 2022. Let’s see: we’re at the tail end of one pandemic and facing another health scare, a war rages on, and the market is unstable. Even for the most seasoned investors, this is pretty hair-raising stuff, let alone for someone just getting started.

If there was a way to chart your path across these stormy seas towards a sunny future, wouldn’t this be the best time to take it? Just imagine having a game plan that combines protecting yourself with growing your wealth — a plan that can do it all. If the term ILPs (Investment-Linked Policies) doesn’t ring a bell (nope, it’s not your bi-monthly laser session, that’s IPL), it’s time to consider this path.

So, what is an Investment-Linked Policy (ILP) really?

Simply put, it’s a policy that has life insurance coverage and investment components. It allows you to accumulate your wealth while staying protected¹. Part of what you pay for the policy will be used to provide life insurance coverage, while the rest will be invested.

Of course, not all ILPs are the same, and they come in two types:

1. Single premium ILP: A single payment for the ILP. They may be eligible to be purchased under the CPF Investment Scheme using your CPF Ordinary Account or CPF Special Account². Most of such ILPs provide lower insurance protection than regular premium ILPs¹.

2. Regular premium ILP: A recurring payment for the ILP, which may allow you to vary the level of insurance coverage based on your needs¹.

Differences aside, the investment component of both policies is the same which involves the selection of funds — an important decision you need to make with the right strategy. We will cover what funds are later in the article.

What are the benefits of Investment-Linked Policies (ILPs)?

(If you’re not sure whether or not you should invest, read our investing primer here!)

You may be wondering if there is any advantage in combining insurance and investment — would they not work together better separately? There isn’t a one-size-fits-all solution, and it all comes down to factors like your personal preferences and needs (e.g., risk appetite). However, here are some benefits that are unique to ILPs.

1. Diversification: Don’t put all your eggs in one basket

Many ILPs let you choose from a wide range of funds. A well-balanced, diversified portfolio can help you tide over difficult times by diversifying your risks instead of over-investing in a single category. For example, Manulife InvestReady (III) plan offers access to more than a hundred of funds, including dividend-paying funds for potential income.

2. Flexibility: Go with your flow

When it comes to flexibility, unlike regular investments or insurance policies, ILPs are the gymnasts of plans. You can move your money from one fund to another to suit your financial situation and risk profile as they change over time. Furthermore, you may also top-up your investments and make partial withdrawals. Most regular premium ILPs also give you the option to customise the insurance coverage according to your needs. For example, with Manulife's ILPs, you can decide on your current priorities (e.g., wealth accumulation, protection or retirement planning) and find a plan tailored to your needs.

Investment-Linked Policies

Investment-linked policies (ILPs) generate potential investment returns with protection

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3. Multi-tasking: Stretch your dollar

Sit back and let your money multi-task to help you achieve multiple purposes all at once. This could allow you to get started on preparing for your financial goals before deciding whether to prioritise wealth accumulation or protection.

How do I pick the right funds?

The range of funds available in each ILP can vary vastly, and it is important to take note of what funds each ILP invests in.

If you’re already scratching your head just reading this, here are some general tips¹ to consider:

1. Look carefully at the risk rating of the sub-fund

2. Select a range of funds matching your risk appetite that is well-diversified

3. Monitor the performance over time

Browsing from a range of options can be intimidating, especially when it comes to making such a significant financial commitment — it’s like finding your life partner.

Similarly, there are some broad questions to ponder before you say “I do”.

1. What are your priorities in life? How will they change with time?

When you’re younger, you may choose to focus on accumulating wealth, but with time, you might prefer some stability and change your focus to protecting your wealth. Whatever your financial goals, it helps to spell them out and chat with a financial consultant for some guidance.

2. How much risk can you take?

Depending on your current financial situation and the outlook of the economy, it’s a good idea to be honest about your risk appetite. Work out how much of your wealth can go into riskier investments with potential higher returns, or slower and steadier investments. We don’t make the rules!

Also, you need to be aware that when you purchase an ILP, the investment risk will be borne entirely by you. The performance of the units is subject to market forces, and the price of the funds of the ILP can rise or fall. If a fund does not perform well, the cash and maturity values will be adversely affected. Therefore, the selection of funds for your ILP is really important, and you need to be willing to stomach the risk!

3. What’s your investment period?

What’s the time horizon of your investment? Are there big financial milestones that you foresee yourself having to save up towards, such as funding your child’s education? Of course, the earlier you start, the longer the runway you have, allowing you to take bigger risks with the potential of bigger gains.

Still unsure of what type of investor you are, or what your goals should be? Whether it’s wealth accumulation, protection or retirement planning, this Investment Calculator can get you pointed in the right direction.