Investment Replacement Feature in Investment-linked Policy that Beat Unit Trust

Investment-linked plan (ILP) is probably the first life insurance policy you buy in Malaysia if you are below age 30 this year. The new business premium collected for ILP will exceed traditional policy in the very near future. In this article, I will show you a special add-on rider that makes ILP stands out as the most wanted policy by young people. This feature is called “investment replacement“.

What is a life insurance rider?

A life insurance rider is insurance that:

• is attached to a policy of life insurance
• adds specified events and contingencies to those insured under the policy
• is subject to the terms and conditions of the policy.

In laymen term, a rider is some extra protection that you add to an existing life insurance policy.

Investment Replacement Feature

It is not a technical term used in insurance industry. In fact, I think I am the one who first use this term to explain to my clients. Imagine that you lose your ability to continue inject capital for investment, it will be replaced if you have this “investment replacement” feature.
When a person invest his money, whether in shares, real estate, unit trust etc, he has to initiate it with the money from his saving. Saving is the money left after he pays all bills from his active & passive income. As long as he continues to manage his cash flow in a positive manner, surplus is available from time to time to be used for investment.
What if something bad happens to him? I would restrict those disaster into 2D – “Dread Diseases” & “Disability”. He will not be able to continue his active task to earn active income. If he has this “investment replacement” feature in his investment-linked policy, his investment can actually continues!

Important feature that Beat Unit Trust & Shares

Let’s say you are able to invest thousands dollar a year, in unit trust, shares or other investment vehicles. With a decent return and years of hard work, you know that you can easily become a millionaire in the future, provided that
1. you let the investment compound with enough time for long term 10-30 years
2. you continue to inject capital from your savings continuously
3. you properly manage the risk to get the return you desire.

What if a dreadful disease strikes you in the first few years. You might lose the time. You might also lose the ability to earn and save. Can you still continue to invest in unit trust? Can you still have the extra savings for share investment? It is hard to tell but the challenge is definitely going to be a tough one.

I’ve read books and heard speakers at seminar saying that you should buy term and invest the difference. But frankly speaking, can you afford a million dollar policy when you just started a career? If you can’t, you are actually jeopardizing your effort to become a millionaire.

That’s why I said that this “investment replacement” feature is the secret weapon that beats unit trust & shares.

How it works?

For insurance agent, this is known as the waiver premium rider or payer benefit rider. These are the insurance jargon used. In laymen term, just remember that it is named “investment replacement” by KCLau 🙂

• This rider is an optional unit deduction rider that can be attached to any Regular Premium Investment-Linked policies.
• This rider waives all annual premiums for Investment-Linked policies upon Total and Permanent Disability or occurrence of any 36 critical illnesses whichever is earlier.
• Insurance charges will be deducted from the unit fund(s). This option can be attached at any time effective at next monthly due.

In short, if you have this rider in your investment-linked policy, the premium under the regular premium investment-linked plan will be waived, if any of the following events occur within the benefit term chosen:

(a) Total and Permanent Disability after age 5 next birthday and before age 65 next birthday;or
(b) Upon occurrence of any of the 36 critical illnesses, whichever is earlier.

Once the disaster happens, make your claim and all you have to do is to live long, and wait for your money to grow. Insurer pays the premium on your behalf. The premium will be used to purchase the investment fund you choose. As long as you are alive, the insurance company will continue to invest for you into your policy until the day you pass away or 70 years old, whichever earlier.
If nothing happens, it is even better because it goes according to your plan. You earn, save, invest and become a millionaire!

New Waiver Premium Rider from Great Eastern

In August 2007, Great Eastern Life Assurance Malaysia just launched a new waiver premium rider, named IL Waiver of Premium Plus (WP-Plus), which gives you the feature discussed above.

Figure 1: The Maximum premiums to be waived.
Although there is a cap of maximum RM24,000 per year per life, it is still a lot of money.

Figure 2: Risk Charges Schedule of WP-Plus rider.

Let’s do a simple calculation exercise.
Life assured age 25 female non-smoker, paying RM2000 yearly premium.
Insurance charges deductible from her investment fund is:
at age 25 = 2000 x 0.81/1000 = RM1.62 per year
at age 26 = 2000 x 0.96/1000 = RM1.92 per year
at age 55 = 2000 x 9.71/1000 = RM19.42 per year

Conclusion:

• this is a “must have” rider for young people, because it is so cheap and affordable.
• compare a million dollar policy which cost few thousands ringgit a year to a waiver premium rider that only costs a few ringgits a year. I know you can definitely do the maths.
• If you only invest in unit trust or shares, and disregard your investment-linked policy as an effective investment tool, you are actually missing a great golden goose!
• the rider becomes expensive at the time we don’t really need it. When you are more than 55 years old, it might be too late to think about investing for retirement, isn’t it? Take a look at the insurance charges after age 55.

Investment replacement feature is definitely a great buy!

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