Investment linked life insurance, also known as investment-linked insurance or variable life insurance, refers to a hybrid insurance product that combines life insurance protection with investment components. It allows policyholders to invest part of their premiums into a range of fund options. The policy value will fluctuate according to the performance of the underlying funds. This product has gained increasing popularity over the past decades for its flexibility, transparency, potential upside returns, and life insurance coverage.
Key features of investment linked life insurance
Investment linked life insurance products have some key features that distinguish them from traditional life insurance:
1. Part of premiums can be invested: Policyholders can choose to invest a portion of their premiums into a selection of funds such as equities, bonds, money market instruments based on their risk appetite.
2. Fund value linked to market performance: The policy value will change according to the performance of the selected investment funds, allowing for potential capital gains. However, investment risks are also borne by policyholders.
3. Provides life insurance protection: Investment linked policies still pay out death benefits to beneficiaries in the event the insured passes away during the term. It covers both investment and protection needs.
4. More flexibility: Policyholders can switch between fund options, adjust premium payment schedules, or make partial withdrawals within certain limits after a few years, allowing them to manage policies more flexibly.
Pros and cons of investment linked life insurance
Investment linked life insurance offers some unique advantages but also has its limitations:
Pros:
1. Upside market potential: By investing in funds like equities and balanced funds, policyholders can benefit from potentially higher returns than traditional life insurance over the long run.
2. Transparency on fund charges: The fees and charges are explicitly disclosed, allowing for easy cost comparisons.
3. Insurance protection remains intact: The death benefit payout ensures dependents are financially protected.
4. Greater flexibility: Policyholders can switch funds, adjust premiums or make withdrawals to better suit changing needs.
Cons:
1. Subject to investment risks: The account value can fluctuate and losses may occur, while charges still apply. Market downturns can negatively impact policy values.
2. Usually longer commitment: Surrendering early may involve high charges. Investment linked life insurance works better for long term goals.
3. More complex with many options: The wide array of funds and options makes selection tricky for less sophisticated investors.
Situations investment linked life insurance shines
While investment linked life insurance may not be suitable for everyone, it stands out for some specific situations:
1. Dual goals of investment and protection: For those seeking upside investment potential and life insurance coverage, this product bundles both needs into one.
2. Long-term core allocation: The funds can serve as part of long-haul portfolio core holdings, while the insurance gives peace of mind.
3. Wealth transfer and legacy planning: The death benefits facilitate efficient transfer of assets to the next generation.
4. Retirement income supplement: Policyholders can make periodic withdrawals in retirement to support spending needs.
Tips for selecting investment linked life insurance
For investors considering investment linked life insurance, keep these tips in mind:
1. Assess dual needs upfront: Determine the right level of insurance coverage and investment flexibility needed before selection.
2. Check fund variety and historical performance: More fund choices and solid past returns can provide more options to optimize growth.
3. Understand all fees and charges: Compare explicit disclosure of costs across a few providers before deciding.
4. Consider rider benefits for enhance protection: Attach riders like critical illness for more comprehensive coverage.
In conclusion, investment linked life insurance offers a way to enjoy market-linked returns while having life insurance intact, but also comes with investment risks and more complexity. Assessing dual needs and understanding costs beforehand helps policyholders leverage its advantages while anticipating the limitations.