Investment-linked life insurance ( ILPs ) started gaining popularity from early 1990s. Their popularity is due to the policy owners demand for higher returns on their policies. The value of ILP is directly link to the performance of the underlying investment funds. Premiums received will be used to purchase the units of the funds and the value of the policy will fluctuate accordingly to the value of the funds purchased. Investment risks of an ILP are entirely borne by the policy owner. Either through a deduction in premium or a reduction of the units purchased, the expenses and insurance charges are paid.
Types of Investment Linked Policies
Investment Linked Whole Life
This types of ILP is very similar to traditional whole life policy as it s designed to provide lifetime protection. The policy owner can choose to vary the level of insurance coverage, in the case of regular premium plans.
Investment Linked Endowment
An Endowment is usually for a specified period of time. The term can be a specified period or till a specified age. This is attractive to policy owner who have a specific or limited time horizon.The units are converted to cash value at the prevailing unit price when the policy mature. A typical ILP endowment is the short term capital guarantee plan. The policy owner is committed for a short period and in addition to having life insurance cover and his capital guaranteed, he is able to enjoy potential return from an increase on unit prices.
Investment Linked Annuities
An annuity creates a stream of income for the policy holder for as long as he lives or till all units are cashed out. He can either pay a regular or single premium to purchase the units. When he retires, a fixed amount of units can be cashed out at specified intervals. Income will fluctuate depending on the value of the units at the time of cash out. Over the long run though the value of the units are expected to increase. But on the other hand, if the value of the units fluctuate too much, the income will be greatly affected. However, some annuity payments can be on a fixed amount basis.
From financial hub published on Jun 15 2010
