5 Things Most Insurance Agents Will Not Tell You about Investment-Linked Policies

An Investment-Linked Policy (ILP) is a hybrid product consisting of two different components: insurance products and unit trust funds. It is gaining popularity as customers can mix-and-match different types of insurance products that offer a sum assured for death, disability, illness, accident, hospitalisation… etc with the life insurer’s range of unit trust funds to create their ideal insurance policies.

ILPs are not only flexible, but also, they are more affordable especially to clients who are in their 20s and early 30s. For instance, if one intends to have a total of RM 1 million in sum assured (death, TPD, and 36CI), he would most likely spend less than RM 1,000 a month on his insurance premiums if he opted for an ILP. It would cost a lot more if he opted for a traditional insurance plan. 

But, with that being said, there are terms and technicalities of ILPs, where most people including ILP policyholders are unaware of. Why? This could arise from a lack of explanation by life insurance agents and a lack of awareness by clients in learning and be familiar with its technicalities. So, let me bridge that gap. In this article, I’ll share 5 major things that you may not know about an ILP in the hope of you understanding your own policy better, if you have any.

Note:
This write-up is meant to be educational. It is not a fault-finding article to either downplay or discredit any insurance agents. I understand that, in some cases, it may not be practical for agents to make lengthy technical presentations on how an ILP works to their clients. 

First, it bores clients. Second, it confuses clients. Third, you don’t get paid more for making such presentations. Fourth, your clients may not have the patience / luxury to study the plan in detail for they want to get things done quickly. So, in short, do not be quick to blame your agent for his or her lack of explanation for your ILP. Instead, you may use this change to call up your agent to clarify and to learn about your ILPs. 

#1: Your Premium is Fixed But Not Your Insurance Charges. 

‘Huh …, what does it mean?’ 

For most ILP policyholders, they know that their premiums, let us say RM 150 a month, are fixed. But, not many of them know that their actual insurance costs are not fixed and will be increased as you age over time. 

For instance, you may buy yourself an ILP when you are in your 20s. Your actual insurance cost is low. Thus, a larger proportion of your premiums would be first allocated into your unit trust funds. Hopefully, they grow in investment value in the future. 

30 years later, you are now in your 50s. Your actual insurance cost has gone up, exceeding your ‘fixed ILP premiums’. How do you cover the shortfall? Simple, it will be taken from the current investment value of your unit trust funds. Hence, despite a rise in actual insurance cost, you’ll somehow maintain the amount of your fixed ILP premiums. 

#2: What if My Unit Trust Funds have been Fully Exhausted? 

Is it possible for that to happen? 

Yes. It could be due to poor investment results from your unit trust funds. Or, it could be due to substantial hikes in actual insurance costs which wipe out all of the investment value in your unit trust funds. 

Will my ILP be terminated by my life insurer if it happens? 

In most cases, life insurers will demand a top-up in premium from policyholders like yourself. If you agree to make extra payments for it, then, all is well. The ILP will continue to be in-force. Otherwise, your ILP will be terminated.

#3: Minimum Allocation Ratio (MAR)

Effective on 1 July 2019, BNM has implemented a new changes to ILPs in regards to its MAR. 

When you make your ILP premiums, the premiums would be categorised under allocated premium and unallocated premium. 

Prior to 1 July 2019, the minimum proportion allowed for allocated premium or MAR from your ILP premiums (for all ILPs bought prior to 1 July 2019) would be as follows: 

Effective on 1 July 2019, the MAR from your ILP premiums (new ILP only) would be as follows: 

In short, for every RM 1,000 in ILP premiums that you made, your life insurance company will have: 

Do you think premiums of ILPs purchased after 1 July 2019 will be the ‘same’ as ILPs purchased before 1 July 2019, considering that life insurers are earning less than the amount before in its first 4-5 years of its operations? Of course, not. As such, ILPs purchased after 1 July 2019 will be more expensive than ILPs purchased prior to 1 July 2019. 

#4: Another Option to Increase Your Sum Assured 

If you have an existing ILP purchased prior to 1 July 2019, you have two options if you wish to increase your sum assured or to add-on other insurance products such as critical illnesses, medical card, personal accidents … etc. 

Option 1: 

You may buy a brand new ILP from your agent. But, the ILP would be costly due to the new changes imposed by BNM for new ILP products. 

Option 2: 

Alternatively, you may consider an increase in sum assured to your existing sum assured of your existing ILP. It may be cheaper for your additional ILP premiums would follow the MAR and projection of investment returns guidelines set prior to 1 July 2019. 

You may compare the two options to find one that is more suitable to you.

#5: How to Get the Highest Sum Assured at the Lowest Possible Premiums? 

In most cases, insurance agents would rely on a software to generate insurance quotations for their clients. Let us say, you will be meeting up with an agent for coffee soon where he intends to propose you an insurance product, maybe, the agent will bring along his iPad where he will use it as an aid to his presentation. 

Awesome.  

Let me reveal a trick that I use to get the best insurance deal for myself. 

For instance, let us say, he proposes an ILP, where the premium proposed is RM 150 a month and its sum assured is RM 250,000. There are two ways for you to get yourself a better deal: 

Option 1: Increase Sum Assured. 

1. Ask your agent to increase the proposed sum assured to RM 300,000. Do not be surprised if the software is able to generate a quotation where the premium is RM 150 a month and its sum assured is raised to RM 300,000. 

2. If that is the case, raise it higher to RM 350,000 or any higher number where the software is unable to churn out an insurance quotation. 

3. Let’s say, the software cannot generate a quotation at RM 350,000. You may lower it down to RM 345,000, RM 340,000… until you reach a nice figure. Most likely, you will end up with a figure which is a lot higher than RM 250,000 which was originally proposed by your agent. 

Option 2: Reduced Premiums. 

1. You may choose this option if your intended sum assured is RM 250,000. 

2. Ask your agent to reduce the proposed premiums to RM 120 a month. If the software is unable to generate the quotation, no worries! You may increase the premium figure to RM 130 and RM 140 a month. 

3. Let’s say, you can have it for RM 130 a month. This means, you saved RM 20 a month in premiums, which is 13% of the original premium proposed to you. 

Conclusion: 

So, there you go: the 5 things that most agents will not tell you about ILPs. 

Of course, you may have more questions. Please do post them below. 

Likewise, if you are a life insurance agent and wish to contribute or correct, you are more than welcomed to post your remarks below. 

Thanks.