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Understanding Investment-Linked Policies: 11 Financial Terms You Should Know Before Investing

You need to understand what you’re investing in.


investment-linked policies financial terms

This article was written in collaboration with Manulife (Singapore) Pte. Ltd. All views expressed in this article are the independent opinion of DollarsAndSense.sg based on our research. DollarsAndSense.sg is not liable for any financial losses that may arise from any transactions and readers are encouraged to do their own due diligence. You can view our full editorial policy here.

Growing our wealth steadily while ensuring adequate insurance protection are two financial aspirations that many of us may share. In times of heightened inflation, like the world we live in today, our purchasing power gets eroded more noticeably. It’s become more important than ever to work towards achieving our financial goals.

One investment product that serves these dual objectives may be an investment-linked policy, or ILP for short. Designed as a hybrid instrument, comprising both investment and insurance components, it not only invests our money but also provides coverage against financial losses to our dependents if we were to face unexpected medical conditions.

Depending on our needs, an ILP can be tailored to meet varying financial objectives through our life stages by adjusting the insurance and investment premiums. As there are investment risks involved when you invest in an ILP, you should understand important financial terms relevant to the product.

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#1 Single Premium Vs Regular Premiums

A single premium policy means a one-time payment is made upfront when purchasing the investment-linked policy (ILP).

On the other hand, a regular premium policy means the payment is made on a regular and defined frequency under the terms of the policy (i.e., monthly, quarterly, half-yearly, or yearly). This is a more affordable option as it allows you to fund your policy on a consistent and regular basis.

Using the Manulife InvestReady (III) whole-life regular premium investment-linked policy as an example, we can contribute regular premiums over a minimum investment period.

#2 Minimum Investment Period

Minimum investment period (MIP) is the term that you chose at the time of application. During the MIP period, you may incur surrender and partial withdrawal charges.

ILPs tend to offer multiple MIPs, and Manulife InvestReady (III) comes in durations of 5, 6, 7, 10 or 13 years.

For example, you may opt for the Manulife InvestReady (III) MIP 10 years Flexi 8. You will be required to pay regular premiums for 8 years. From year 9 onwards, you can stop paying premiums without incurring a premium shortfall charge. On the 11th year, you can start withdrawing from the policy without incurring partial withdrawal charges.

It’s also worth noting that once the MIP is selected, you cannot change it after the policy’s inception. Therefore, you should determine your financial goals (and needs) first before deciding on the MIP.

#3 ILP Funds

Based on your risk appetite, you can choose to invest in a range of ILP funds. The portfolios can comprise different asset classes, such as equity, bond, mixed asset, and money-market funds, which you can choose to allocate to build an effective portfolio that suits your investment objectives.

For instance, the Manulife InvestReady (III) offers access to a diverse range of professionally managed funds, including dividend-paying funds that could be suitable if you seek an income-producing portfolio. By diversifying your investments across various ILP funds, it can help to spread the concentration risk and potentially enhance your returns.

#4 Fund Switching

Investment-linked policies often allow you to move part or all of your money from one ILP fund to another within the same policy. This is known as fund switching. For ILPs like Manulife InvestReady (III), you have the flexibility of unlimited free fund switches to respond to changing market conditions and to ensure your investment portfolio stays aligned with your financial goals.

Fund switching should not be taken lightly. Even though you have the flexibility to switch anytime, you should aim to invest and diversify your investment portfolio into a range of funds that can deliver long-term returns from the get-go.

#5 Bonus Units

There are various types of bonuses that are issued in the form of additional units when investing in an ILP. With Manulife InvestReady (III), you can expect to receive a welcome bonus. In addition, you can receive an annual premium bonus if the first basic premium is paid via annual premium mode. Both the welcome bonus and annual premium bonus are one-time bonuses that are paid as a percentage of the 1st year basic premiums.

The third bonus is the loyalty bonus. This is distributed annually after completing your chosen MIP as an incentive to continue staying invested in the policy.

#6 Fees

Fees refer to all charges associated with the ILP. In general, this may include (the list below is not exhaustive):

  • Cost of insurance
  • Policy charge
  • Surrender charge
  • Partial withdrawal charge
  • Premium shortfall charge
  • Fund management charge

Details of all charges for an ILP can be found in the product summary and policy contract. Additionally, the respective fund charges can be found in the product highlight sheet, prospectus, and fund factsheet.

#7 Premium Holiday

One of the features embedded in certain ILPs is the option of a premium holiday. This allows you to take a break from paying the premium for a certain period. During this break period, the ILP’s charges, listed in #6 above, may continue to be applicable. These charges will be deducted from the account value by cancelling units from the funds.

The policy may lapse when there is insufficient account value for the applicable charges.

#8 Account Value

Account value refers to the total value of all units in the policy.

Keep in mind that when reviewing your policy illustration, you should understand that the account value is not guaranteed. The numbers you see are based on an illustrated investment rate of return.

#9 Reinvest Dividends

If any dividends are declared by the dividend-paying funds in an ILP, they will automatically be reinvested back into the respective funds. For ILPs like Manulife InvestReady (III), you can choose to receive the potential dividends on a regular basis. However, if you had reinvested the dividends and wish to withdraw the accumulated reinvested dividends, you can withdraw these accumulated dividends at any time without charges.

Of course, if you reinvest dividends and compound your returns, your account value, which may fluctuate based on market and other conditions, could snowball to a larger value more quickly.

#10 Riders

Riders are optional supplementary benefits that can be added to the insurance component of an ILP for enhanced coverages on top of the death and terminal illness base coverage. An ILP like the Manulife InvestReady (III) also offers optional Premium Waiver Riders covering cancer, critical illness, terminal illness, and total and permanent disability.

Another rider that is available with the Manulife InvestReady (III) plan is ReadyCare Riders, which can even allow you to use your existing investment value to fund and enhance your insurance coverage. The ReadyCare Riders can provide you with a holistic solution that addresses your long-term financial goals that safeguard you against unexpected circumstances such as critical illness, hospitalisation, terminal illness, and death.

#11 Death Benefit

Some ILPs may offer coverage against death and terminal illness. The payout amount to the beneficiaries can be determined as a percentage of the total basic premiums paid (excluding premiums paid on riders) and based on the level of insurance coverage.

For instance, the Manulife InvestReady (III)  has a death and terminal illness benefit paying the higher of 101% of the total basic premiums paid (less any withdrawals, if any) or account value.

As stated above, you can choose to boost your protection coverage with relevant riders on your ILP.

Investing In Your Future

While most of us are aware of the virtues of investing as early as possible to have a longer time horizon to compound our returns, we may feel overwhelmed due to the plethora of options and not take any action.

Furthermore, when we are young and healthy, we may also be complacent about the urgency of having insurance coverage, but it is also when we are most insurable at a lower cost, which we should capitalise on.

That’s where Manulife InvestReady (III), a whole life investment-linked insurance policy, may offer a simple solution to get us started on not only investing to grow our money but also having insurance coverage against unforeseen circumstances that can set us back financially or burden our loved ones.

With a diverse range of professionally managed funds to choose from, 100% of the basic premiums will be used to invest in the funds of our choice.   Furthermore, the various bonuses given in the form of additional fund units help to boost the account value of the ILP.

We also have the additional option of utilising the Premium Waiver Riders and ReadyCare Riders to enhance our insurance coverage during challenging life events like critical illness, or hospitalisation.

Learn more about the Manulife InvestReady (III) or get in touch with a financial consultant to find out how it fits with your financial objectives.

Read Also: Young Working Adults: What You Need To Know To Plan For Your Retirement

Important Notes

Manulife InvestReady (III) and its supplementary benefits are underwritten by Manulife (Singapore) Pte. Ltd. (Reg. No. 198002116D). This advertisement has not been reviewed by the Monetary Authority of Singapore. Buying a life insurance policy is a long-term commitment. There may be high costs involved if you terminate the policy early, and your policy’s surrender value (if any) may be zero or less than the total premiums paid. Your investments are subject to investment risks, and you may lose the principal amount invested. The performance of the InvestReady Fund(s) is not guaranteed. The unit prices and any income accruing to it may fall as well as rise. The Fund Managers shall have the absolute discretion to determine whether a distribution is to be made in respect of the InvestReady Fund(s) as well as the rate and frequency of distributions to be made. The intention of the Fund Managers to make the distribution and the distribution yield for the InvestReady Fund(s) is not guaranteed, and the Fund Managers may review the distribution policy depending on prevailing market conditions. Distributions may be made out of income, net capital gains and/or capital. Past distribution yields and payments are not necessarily indicative of future distribution yields and payments. Any payment of distributions by the InvestReady Fund(s) may result in an immediate decrease in the net asset value per unit. You should read the prospectus and the product highlights sheet and seek financial advice before deciding whether to purchase units in the InvestReady Fund(s). A copy of the prospectus and the product highlights sheet can be obtained from a Manulife Financial Consultant or our Appointed Distributors.

This article is for your information only and does not consider your specific investment objectives, financial situation or needs. It is not a contract of insurance and is not intended as an offer or recommendation to purchase the plan. You can find the full terms and conditions, details, and exclusions for the mentioned insurance product(s) in the policy contract.

This policy is protected under the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC). Coverage for your policy is automatic and no further action is required from you. For more information on the types of benefits that are covered under the scheme as well as the limits of coverage, where applicable, please contact us or visit the LIA or SDIC websites (www.lia.org.sg or www.sdic.org.sg)

We recommend that you seek advice from a Manulife Financial Consultant or our Appointed Distributors before making a commitment to purchase a policy.

Information is correct as at 22 December 2023.