ANDY has a conventional life insurance policy bought some years back. He often wondered if there was a way his policy’s cash value could grow at a faster pace. While he dabbles in the stock market now and then and although he is aware that his policy is meant to provide financial protection against unfortunate events, he felt that the money going towards his insurance could be put to better use.
Andy soon found the answer in investment-linked policies. As consumers like Andy become more discerning and sophisticated in their financial needs, insurance companies have come up with investment-linked plans which combine insurance protection and potential for investment growth.
How do they work? Just like conventional insurance, you pay a premium too.
The difference is, part of the premium will be invested in a specific investment fund of your choice; the funds are managed by the insurance company’s fund managers.
You can even decide for yourself the allocation of your insurance premiums — how much goes to protection and how much to investment.
The portion allocated to investment is then utilised to buy units of the investment fund you chose. Each unit is valued equally and their daily prices are published in the newspapers in order for you to track how your investment is performing.
If you look at the published prices, you will notice two prices: bid and offer.
The bid price indicates the price the fund will buy the units back from you while the offer price is the unit’s selling price.
Any difference (usually around five per cent of the offer price) between the bid and offer prices is the charge for the transaction.
Most plans offer a range of funds for you to choose from, based on your risk tolerance and investment objective. These funds invest in stocks or bonds.
The investment objective and asset allocation of the funds differ and it is up to the policyholder to chose a fund that meets his objective.
In Andy’s case, he is young and does not mind a high risk in his investments.
He chose to invest in a growth fund, which emphasises capital appreciation.
If the fund invests substantially in the stock market, a fair bit of volatility is expected and policyholders who invest in this fund must understand the risks that come with it.
If you prefer something a little more stable, then a bond fund may suit your needs although the returns may not be as high.
But you still need to monitor the ups and downs taking place in global financial markets as these events will have an impact on the performance of the funds.
Bear in mind that when you are exposed to financial markets, the value of your investments could go up, it could also go down.
For investment-linked plans, the total value of the plan fluctuates with the movements in the unit price.
So why invest? If you are skilled in reading the markets, you could reap handsome gains in the long run.
What makes investment-linked policies unique is the flexibility they offer to policyholders.
You have the flexibility to choose your own level of protection and investment.
You can vary the amount of your premium payments or coverage according to your changing financial needs.
For sure, investment-linked policies require a little more work on the part of the policyholder - flexibility comes with responsibility.
If you are new to investment-linked plans, don’t miss next week’s article where we will discuss other features of the product.