Investment-linked life insurance policies differ a great deal from whole life insurance policies. For Singaporeans, knowing the difference is of great importance if one is to stay clear of investment risks. Understanding the two also allows one to know which one is best suited for sufficient coverage depending on needs.
Investment-Linked Life Policy
Investment-Inked Life insurance is a type of insurance product that in addition to providing insurance coverage comes with an investment aspect. The investment part of the policy seeks to give policyholders returns on invested premiums.
With ILP life insurance policies, part of premium payments goes towards purchasing fund units that generate returns depending on market conditions. Fund managers come in handy in investing policyholder’s funds in products that generate returns.
ILP life insurance policies also do offer additional monetary benefits as agreed during the signing of the contract. It is thus essential to sit down with an insurance provider to decide on such events. Policyholders can also use the opportunity to agree on additional riders that can boost insurance cover.
However, it is important to note that ILPs are ideal for people who can contend with high fees relative to insurance costs.
Whole Life Policy
Whole Life insurance is a type of insurance product that provides coverage for specified life events such as death. There are two types of whole life policies. The first one comes with an investment aspect whereby an insurance company may invest policyholder’s funds in low-risk financial instruments such as government and corporate bonds.
Any gains from the low-risk investments are most of the time paid out in the form of bonuses and dividends. Such whole life policies offer decent returns in the long run. The second type does not come with an investment aspect. It is for this reason that non-participating whole life policies come with low premiums.
Differences between Whole Life Policy and Investment-Linked Life Policy
The main difference between ILP life insurance and whole life policy revolves around the use of premiums. In Whole Life insurance policies, premiums most of the time, end up catering for insurance costs. Whole life insurance premiums provide insurance providers with the financial muscle to cater to financial expenses arising from a catastrophic incident on the insured.
In contrast, in ILP life insurance policies, insurance providers first use premiums to buy fund investment units. Upon the sale of the units, is when the insurance companies get the finances to cater for costs of insurance as well as other brokerage and insurance fees. For this reason, ILP Life insurance plans are purely investment plans that offer coverage similar to insurance plans.
Another significant difference between ILPs and Whole life insurance pertains to the cash value. Contrary to popular opinion, one doesn’t need to get higher returns from ILP life insurance policies. Actual return can at times be much lower, than anticipated, depending on market condition.
In contrast, whole life policies offer cash value upon a policyholder meeting all the terms. In some instances, non-guaranteed bonuses may also come in handy.
Investment-Linked life policy stands out in part because they tend to provide higher returns most of the time. In contrast, Whole Life Policy only offers modest returns given the low-risk investments they come with.
Both Investment-linked life insurance and whole life insurance products stand out as they come with unique pros and cons. For that reason, it is crucial to understand the two and carefully examine which one is ideal depending on needs at hand.