We all know how confusing insurance/takaful can get. How do you decide which ones are the best for you? What if you already have insurance/takaful? Is it time to re-evaluate and upgrade your policy? Is your policy/certificate sustainable (and what does that even mean)? Well, I hope my post will be able to help you out as I will be recapping what I learnt from the Life Insurance Association of Malaysia (LIAM) and Malaysian Takaful Association (MTA) about Investment-Linked Insurance Policy / Takaful Certificate (ILP). Disclaimer: This post is sponsored by them with the aim to educate the public about ILP.
Before we get to it, let's go back to the basics. What is an investment-linked insurance/takaful plan?
An investment-linked plan is a life insurance/family takaful plan that combines INVESTMENT and PROTECTION. Your premiums/contributions, which refers to the amount you pay every month, provides you with life insurance/family takaful cover but part of it will also be invested in specific investment funds of your choice. The insurance/takaful coverage provided would include death benefit along with optional riders such as protection for disability and critical illness. This is your PROTECTION..just in case something bad happens to you in the future. As a policyholder, you can choose how to allocate your insurance premiums/takaful contributions towards protection and investment.
Some of you may be wondering about takaful
Yes. There is also an investment-linked takaful, whereby part of your contribution will be allocated to a takaful fund in the form of participative contribution (tabarru’), and the balance of the contributions will be used to purchase the Shariah-compliant investment-linked units. A takaful operator will act as a manager to oversee the management of the investment fund. In return, the takaful operator receives a fee (ujrah) for its service.
Okay, now that the basics are clear..Take a moment to sit down and think:
Is ILP right for you?
Life is always changing. As we move from one life stage to another – from a single working adult, married with kids, to retirement etc – our needs and priorities change. This is why it is wise to have a flexible and customisable insurance/takaful protection plan. A fresh graduate with a new job might not need the same amount of protection as a married couple about to have kids. And a retired person might need more coverage due to old age and medical needs. Based on the unique features listed, you can change your insurance/takaful plan according to your priorities and needs at every life stage due to the flexibility of the plan.
How ILP works
As mentioned in the beginning of this post, part of your premiums/contributions will be invested in specific investment funds of your choice. Your investment fund will cover insurance/takaful charges to pay for your insurance/takaful cover and also other charges such as policy fees and fund management charges. Since it is an investment, you may get a higher return or cash value when the market is performing well. However, do keep note that ILPs carry investment risks and it does not guarantee cash values as it is dependent on the performance of the funds your premiums/contributions have been invested in.
When the investment performance is not doing well, it will deplete your cash values. Other factors that could lead to cash values’ reduction are partial withdrawals, not paying premiums/contributions when it is due and choosing not to increase premiums/contributions when increasing protection cover. Remember, the depletion of cash values could affect your policy/certificate’s sustainability.
As a consumer knowing this, what can I do about it? Well, I can decide to increase premiums/contributions to sustain the policy, reduce the coverage period or make adjustments on investment fund choices. And what is the government doing about it to help consumers? They introduced the BNM guidelines of sustainability reports being issued. On 1st July 2019, Malaysians who are on ILPs will have to communicate with their relevant agents or insurer/takaful operator to see how well their investment performance are doing and if their coverage will be enough for them or not -- as they may have to top up their monthly premiums/contributions or reduce their protection cover to restore the sustainability of their policies/certificates.
For ILP sold after July 1 2019, insurers/takaful operators must set premiums/contributions that are expected to be sustainable until the end of the contract term, whereby all types of funds have to have a more conservative estimations so that ILP owners can focus more on protection, rather than just investments.
Here is a sample of a product illustration/sales illustration of an ILP policy that must be presented at the point of sale. From 1 January 2020 onwards, "Scenario X" must refer to return rates of 2%, while "Scenario Y" is set at 5%.
How to check on the status of your plan? From 1 January 2020, you will be given a yearly statement on how long your policies can sustain based on the amount of your premiums/contributions. For policies sold before 1 July 2019, insurance companies have an obligation to send a pre-lapse notice for ILPs that will lapse within the next 12 months.
In conclusion, you have to remember that investment-linked plans, like other investments, involve exposure to investment risk. Make sure you fully understand the risks involved and be prepared to have your money tied-up for a certain period. You can get professional advice from your insurance company/takaful operator or your agent on the risks and benefits of a particular investment-linked insurance/takaful plan.
Any questions? Feel free to ask me in the comments section below!