What is Investment-Linked?

An investment-linked (IL) assurance is a relatively new product in Malaysia. The first IL policy was issued in the UK in 1957 under the name “unit-linked policy”, and in the US in 1976 as a “variable-life policy”. In this region, IL products first appeared in Singapore in 1973, while Malaysian policyholders were only offered IL products since 1997.

An Investment-linked assurance policy is basically a combination of investment and the pure insurance protection. It’s true that some traditional life assurance products such as the Endowment, and to a certain extent the Whole Life, are themselves not pure insurance protection products and they do contain a savings element too. However, this is to be differentiated from the investment element of an IL product, which caters for more aggressive capital growth and forms a larger proportion of the policy, compared with the traditional with-savings life assurance products. In fact, the investment portion of an IL policy may be as high as 90% of the net premiums, meaning that only 10% goes towards purchasing insurance protection for the insured person.
The investment portion may be invested in a number of funds which are being managed by the insurance companies. The types of funds commonly available are similar to those being offered on the unit trust market, such as equity funds (aggressive growth, higher risk), fixed income funds (investment in low-risk securities), and balanced funds (a mix of the two, medium risk). Several companies also offer Syariah or Islamic funds.
All IL assurance policies are non-participating policies. Any surplus arising out of the insurance fund belongs to the insurance company, but this is usually not an issue since the insurance portion is normally quite small.

How Do IL Products Work?
Essentially, an IL assurance policy can be imagined to consist of two parts : the unit portion, and the non-unit portion.
Every premium that is paid is divided into the two portions according to a pre-determined ratio, after deducting the cost of providing any additional rider coverage, expenses and commissions. This ratio is dependent on the sum assured required (the insurance protection part of the policy), and the age and risk rating of the insured person. The higher the sum assured required, or the higher the age and risk, the higher the ratio to the non-unit portion will be. The balance of the premiums paid will go into the unit portion (the investment part of the policy). Some of the products offered allow the policyholder to change the sum assured required, which effectively changes the ratio of protection to investment. This allows the policyholder to maximise investment opportunities when capital markets are favourable, and to maximise insurance protection when it is most needed.
It is called the unit portion because the balance of premiums being paid in will be unitised in the investment fund of the policyholder’s choice. Unitisation is a process of converting ringgit value to number of units, at the current unit price of the chosen fund. The unit price is calculated as the total net asset value of the fund divided by the total number of units.
Policyholders may transfer the value of some units to the non-unit portion of their policy to increase the sum assured, or even withdraw some of the money invested in the unit portion by ‘cashing-in’ some of the units held in their account. However, there is a ‘penalty’ in the form of a bid-offer spread, which is the difference between the buying price and selling price of units – this is typically 5%. In addition to this, the insurance company (or fund manager) will charge an annual fund management fee on the total units held – this is typically 1.5%.

What Are The Policy Benefits?
There are two ways in which the death benefits of an Investment-Linked assurance may be structured. Upon death of the insured, one of the following will be paid out :
Type 1 : Value of units in unit portion + Sum assured of non-unit portion
Type 2 : The higher of the value of units or the sum assured
Type 1 policies are more common in annual premium plans where premiums are paid regularly, while Type 2 policies are more common in single premium plans where premiums are paid in one lump sum at the inception of the policy.
If a policyholder wishes to surrender (terminate) an IL policy, the cash value of the unit portion plus the value of units will be returned, after deducting any surrender penalty and the bid-offer spread.
Can I Purchase Riders With An IL Policy?
Almost all companies will allow some riders to be attached to the basic IL policy. The types of riders available are similar to those offered with the traditional life assurance policies.