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Investment-linked policies continue to see demand, but are they worth the money?

Insurers say investment-linked policies offer the best of both worlds, but critics say investment and insurance should be kept separate.

SINGAPORE: Hoping to be more disciplined in building up her retirement nest egg, Ms Paige Kwok took up an investment-linked policy last month.

The 35-year-old already has one such policy where a part of her policy premium is invested and the rest goes into insurance coverage against critical illnesses.

As she mulled over how to boost her savings in the face of rising inflation, Ms Kwok decided to take up a second investment-linked policy – one that leans more towards investments and will see all of her S$500 monthly premiums go into a medium-risk portfolio of funds over a period of 15 years.

“I didn’t save much when I was younger so once I started working and paid off my university loans, I use investment-linked policies to … train myself to save,” Ms Kwok told CNA.

“I think I’m now at an age whereby I should put (my money) in policies that can help me to get more returns, and my new plan offers just that.”

Investment-linked insurance policies have been a mainstay in the offerings of insurers here after first gaining popularity in the early 1990s.

Its “two-in-one” function of having life insurance coverage alongside the opportunity to invest in a variety of professionally managed investment-linked funds is its biggest selling point, insurers said.

Even so, not all investment-linked policies are the same. 

For example, some have a stronger protection element and offer more comprehensive insurance coverage. There are also “pure wealth accumulation” policies, which focus on investments and come with very little insurance coverage, such as having death benefit as the only coverage.

Policies also differ in the terms of the minimum investment period, frequency of premiums and the range of available investment-linked funds, among others.

Overall, investment-linked policies continue to see steady demand over the years, insurers told CNA.

Prudential said that rising inflation and interest rates, as well as global economic uncertainties, have prompted more people to review their finances and seek ways to grow their money.

Investment-linked policies are a popular option given their potential for higher returns versus traditional endowment or whole-life policies, said its head of product management Jason Lim.

New offerings are also available to those who are more risk-averse, such as one by AIA that offers a capital guarantee. Investment-linked policies typically do not have guaranteed cash values as that depends on the performance of the invested funds.

Other deal sweeteners include the option of a premium holiday, which allows policyholders to take a break from paying premiums for a certain period without the policy lapsing. During this break, the policy will sell units from the investment-linked funds to maintain insurance coverage.

This offers flexibility during difficult times, said Great Eastern’s head of products and propositions Eddy Lim.

Non-payment of premiums typically results in early termination of policies – an undesirable outcome for policyholders who may not get the same underwriting terms should they reapply or reinstate the plan subsequently, he said.

For Ms Kwok, her new investment-linked policy from AXA Singapore, which has been acquired by HSBC and will be rebranded to HSBC Life, offers the choice to take a “premium holiday” for up to 84 months.

This was one of the key considerations she had as she weighed her options, she told CNA, adding that it will be helpful to cope with unforeseen financial difficulties.


Nevertheless, there are downsides to be considered.

One commonly mentioned disadvantage of investment-linked policies is the mortality charge or the cost of insurance coverage. This is typically funded by the sale of invested fund units.

“This mortality charge will get more expensive as you age so there is this concern that as you get older and need insurance even more, your investments may not be enough to cover these insurance charges, especially when your funds are not performing,” said Providend’s senior client adviser Tan Chin Yu.

When that happens, policyholders may be asked to pay higher premiums or the policy will lapse.

Policies that lean towards investments and have minimum insurance coverage typically do not have this downside, but they are not spared from two other issues – high fees and inflexibility.

Beyond mortality charges, another common gripe about investment-linked policies is the list of fees and charges that may add up to be a drag on returns.

A look-through of different insurers’ product brochures showed these major cost items:

  • Fund management fees
  • Supplementary charge or wrap fee
  • Fund switching, top-up premium, partial withdrawal or surrender charges
  • Other policy and administrative fees

“Apart from the fund management fees that go to the fund managers, there are also what we call ‘product wrapper’ fees,” said Mr Tan.

“Investment-linked policies are products created out of existing unit trusts, like a ‘wrapper’ of many different funds. As you access this bundled product, there are fees to be paid to the insurers and commissions to the agents.

“These additional distribution fees will add up to be at least 2 per cent for most investment-linked policies,” he added.

Insurers have begun doling out welcome or loyalty bonuses in the form of additional fund units, but Mr Tan noted that these do little to offset the high fees.

“Cost is definitely a big factor for investors as it eats into your returns and when inflation is high, your value of money goes down even further.”

Then, there is a limitation in flexibility – firstly in the form of investment options as policyholders can only pick from the pool of funds provided by each insurer; and secondly, having to commit to a minimum investment period that is typically 10 years or more, Mr Tan said.

Early termination will involve surrender charges and the surrender value, depending on each policy, may be zero or less than the total premiums paid.

While investment-linked policies may offer retail investors the rare opportunity to put their money into funds for accredited investors, these funds tend to be high-risk and may not necessarily translate into higher returns, said the financial adviser.

Mr Tan said he would not recommend that clients take up investment-linked policies.

“Our stance has been to always advise our clients to keep investment and insurance separate,” he said, adding that retail investors have plenty of lower-cost options to invest in various asset classes these days. “There’s no need to mix and match insurance with investments.”

Mr Bernhard Kotanko, senior partner at McKinsey & Company, said investment-linked policies still serve a growing segment of customers who prefer formalised wealth management advice and portfolios. But insurers will need to develop more innovative products to meet evolving needs.

“Investment-linked policies need to construct more distinctive investment offerings, especially in including low-cost exchange-traded fund portfolios and private investment offerings,” he said. 

“(They) also need to be combined and delivered with proper advice and explanation to customers and distributors on long-term financial and life planning.”

When it comes to fees, AIA Singapore’s chief product proposition officer Irma Hadikusuma said that compared with traditional plans, investment-linked policies offer “greater transparency” in terms of the different fees and charges which “often gives rise to a perception of higher charges”.

On mortality charges, Great Eastern’s Mr Lim noted that while this tends to increase with age, it also means that those who purchase the policy at a younger age will have a bigger portion of the premium allocated for investment use. 

Starting early will enable these investments to compound over a longer time period, he added.

Insurers stressed that as with any investment, consumers mulling an investment-linked policy should first determine their financial goals, investment horizon and risk appetite. Such policies should also be seen as a long-term investment.

“Time in the market is important for investment-linked policies as this will help ride through market volatility and can also help achieve better potential returns,” said HSBC Life Singapore’s chief product officer Daniel Lum.

“Also consider dollar cost averaging by investing regularly in a disciplined manner which eliminates emotions from both good and bad investment days,” he added.

Mr Lim from Prudential echoed that investment-linked policies are more suited for those with a longer investment horizon. People must also be aware that these plans carry investment risks and that past fund performances may not “necessarily mean similar performance level in future”.

“If you are uncomfortable with taking this risk and want a product that offers guaranteed returns, investment-linked policies may not be the right product to go with,” he said.

Source: CNA/sk(cy)


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