HOW TO INVEST MONEY (non illustrated)

A small investment in preventative maintenance helps avoid the more An avoided cost is also a cost saving, but the reference is to a charge not yet incurred. . Cash flow summaries with cost savings avoided costs opportunity costs.
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A level term policy has an initially higher premium that does not change for a set period, usually 10, 20 or 30 years, and then becomes annual renewable term with a premium based on your attained age. All permanent life insurance policy illustrations are hypothetical and include ledgers that show how the policy could perform under both guaranteed and non-guaranteed assumptions. Understanding Permanent Life Insurance. Non-guaranteed policies are typically illustrated with a premium that is calculated based on a favorable assumed rate of return and policy fees that could change.

The lower premium payment is great as long as the performance of the policy meets or exceeds the assumptions in the illustration. Some permanent policies offer a rider , for an additional cost, that is part of the contract and guarantees the policy will not lapse. The policy is guaranteed, even if the cash value drops to zero, as long as the planned premium is paid as scheduled. Depending on how the policy and the premium are calculated, the no lapse guarantee can range from a few years out to age However, in exchange for transferring the risk back to the insurer these policies typically have a higher premium and build little cash value.

Whether you should buy guaranteed or non-guaranteed life insurance coverage depends on many factors.

Make (full) sense of insurance policies

Why are you buying life insurance? Some insurers also publish unit prices on their website. Flexibility Most regular premium ILPs give you the flexibility to vary the insurance coverage and investment mix if your financial needs change.

You may top up your investments, make withdrawals and switch sub-funds. But any increase in coverage will be subject to underwriting. You may also request premium holidays, during which you can stop paying premiums temporarily without having to terminate your policy.


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  2. Or end up like office worker who complained that insurer didn't honour terms of her plan.
  3. Investment-Linked Insurance Policies!
  4. What are Avoided cost and Opportunity Cost?.

Do check the Policy Contract and Product Summary for the various charges which apply when you make these changes. The key differences between ILPs and other life insurance policies, such as participating whole life and endowment policies and term insurance policies, are summarised in the following table: Returns are not guaranteed ILPs carry investment risks. The value of an ILP varies, depending on how the sub-fund you have chosen performs. The returns are not guaranteed. Do note that the past returns of a sub-fund are not necessarily indicative of the future performance of the sub-fund.

Units may be insufficient to pay the insurance coverage charges Insurance coverage charges usually increase as you grow older, as the risk of death, disability and illness increases with age.


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    • This is even if you maintain the same coverage sum assured. The increasing cost is factored into the amount of premiums we pay. Even if you are paying the same monthly premium, more units may be deducted to pay the higher insurance coverage charges, thus leaving fewer units for investment. If you have a combination of high insurance coverage and a poorly performing investment-linked sub-fund, the value of the units in your policy may not be adequate to pay the insurance coverage charges.

    In such a scenario, you will have to increase your premium payment or reduce the insurance coverage. Generally, any increase would be applied to an entire class of policy and not just to an individual policy. The different types of fees and charges are as follows:. Note that fees and charges may not be guaranteed and are subject to change. These fees and charges including distribution costs such as commissions are typically deducted from the monthly sale of units. Purchase of units The full amount of premium paid may not be used to buy units.

    For regular premium policies, the amount of premium used will depend on whether it has a "front-end" or "back-end" loading. The remainder pays for units. For example, the allocation rates for a regular premium plan may be:. The diagram below illustrates how the allocation rate is applied to the first year premium for a regular premium ILP with front-end loading:. In the above example, the number of units is rounded to nearest whole number. Distribution and administration costs are covered by back-end charges imposed when you surrender your policy, partially or fully, within a certain period of time.

    Although the premium allocation structure differs for front-end and back-end loaded ILPs, the overall effect of the charges will be similar. The offer price is the price paid to buy units. Units are then sold at the bid price to pay for the various charges. The cash value of the ILP depends on the number of units you have and the bid price of those units.

    Bid and offer prices depend on the performance of the sub-fund s and change on a daily basis. The methodology and how often unit prices are computed vary from sub-fund to sub-fund and is explained in the Product Summary and Policy Contract. After deducting fund management charges from the net asset value, the balance is then divided by the total number of units to derive the unit price.

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    However, CPF members who have purchased regular premium policies prior to can continue to have the regular premiums paid from their CPF savings. You may not need life insurance if you do not have any dependants, e. If you are considering an ILP, do think about whether you can keep up with the premiums if you no longer earn an income. Also, ILPs are better suited for consumers with a longer investment horizon to ride out market fluctuations and defray initial costs which can seriously limit short term potential returns.

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    There may be other investment options that could better suit your needs. Similarly, if insurance protection is a significant objective, but coverage is required only for a limited period, there could be other insurance options you should consider. Your insurer will send you a statement, at least once a year. This statement shows the value of units in the policy, transactions for the period and charges paid through the sale of units.

    Make sure you review this statement to check if the ILP and sub-fund s selected continue to suit your needs. Seek advice if your circumstances and what you need have changed. What is the difference between an ILP and other life insurance policies? What risks do ILPs have? How much would an ILP cost? But what if the insurers are just being cautious when they offer lower guaranteed values? Well, check out the insurer's bonus track record. It is prudent to understand how bonuses in life funds work. There are usually two types. One is a reversionary bonus, which is declared annually and becomes part of the guaranteed value.

    The terminal or maturity bonus is typically a one-off declared on maturity of the plan and is expressed as a percentage of the accumulated annual bonuses to date. Bonus rates have steadily declined over the years. They are affected mainly by the fund's investment strategy and experience as well as other factors such as claims and incurred expenses. Insurers may cut bonus rates and this usually happens for the cohort of policies whose previously quoted rates of return at inception have become unsustainable due to increasingly depressed yields.

    However, insurers do try to avoid cutting rates as this causes dissatisfaction among policyholders. Instead, newer policies are quoted with lower rates of return.

    Term Policies

    With the exception of Tokio Marine, almost all insurers have cut bonuses in the past. The worst on record is AIA, which cut terminal or maturity bonuses to zero in , affecting regular-premium endowment policies maturing that year, recalls Mr Lim. The bonus cuts are mitigated by the insurers' practice of "smoothening" returns in par policies. This means that in a good year, the insurer may choose to pay out its normal bonus rate and retain more surpluses. In a poor year, it may distribute more of the retained surplus as bonuses to maintain the bonus rate.

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    The effect is a fairly smooth rate of return, which masks any volatility that the life fund may experience. Every year, you will receive an annual bonus update that will show you the bonus that your policy has accrued. You will also receive a par fund update which gives a snapshot of the insurer's life fund performance over the past three years. Do note that for some participating plans, some insurers have done away with the traditional bonus structure and are offering a non-guaranteed dividend-paying plan instead.

    Cash dividends are non-guaranteed, but when given do not add to the sum assured. And depending on the product design, they may be given annually only after the insured reaches a certain age or upon a claim or surrender. Furthermore, look at the long-term track record of insurers' investment returns on life funds. Last but not least, it is important to ensure that you can afford the premiums and are able to pay them throughout the plan tenure.

    Policyholders who surrender their plans prematurely are likely to incur losses and, in some cases, get nothing back. Recognising this, insurers have been offering "limited pay" plans that require customers to pay, say, a shorter five-year period, but the plan tenure could be a longer year period. We have been experiencing some problems with subscriber log-ins and apologise for the inconvenience caused. Until we resolve the issues, subscribers need not log in to access ST Digital articles. But a log-in is still required for our PDFs. Skip to main content. A version of this article appeared in the print edition of The Sunday Times on November 08, , with the headline 'Make full sense of insurance policies'.