Thursday, September 24, 2009

Investment Link Insurance products

Insurance is an industry that is most dedicated to the complete picture of our personal finances. This has become even more apparent when Investment Link Products (ILP) are introduced to the market.

There is really nothing new to ILP other than it actually reveals the elements of insurance to agents and buyers. Which used to be secrets and all they told you was "Don't worry, we will be able to pay you 6% interest every year".

Now with ILP, agents and insurance buyers can decide
1. What elements to put in their policies
2. How much of each element to put in
3. to change the allocation from time to time
This can go either way, good or bad, for you. Before there was ILP, the proffesionals inside the insurance company decide all these for you. In return they can vaguely promise you a 6% return ( in quotation but not in policy ). So in the simplest term, if you can DO BETTER than the pro, then ILP is better for you. Else you may not even get the return like others who are just paying premium, without the need to understand anything else, as in a truly 'passive' tool.

There are 4 to 5 important elemetns to understand in ILP but for simplicity we can group into 2 first; protection elements and invesments.
Protection element in ILP is almost the same as Term Insurance.
Investment element in ILP is the same as mutual fund.
So basically ILP = Buy Term Invest The Rest, which is one of the best ways to build your personal finance portfolio.

Since the elements are configurable now and that the agents are trained but most buyers have not caught up to the idea yet, the agents can configure in a way that;
High Protection Low Investment ~~> Cheaper than Traditional Products
Low Protection High Investment ~~> Gives Better Return than Traditional Products
without properly educating on the side effects
High Protection Low Investment ~~> May Not have enough cash value to keep the policy alive in future
Low Protection High Investment ~~> Not enough protection for initial years
So if the buyer is only stressing on one aspect only ie. Low Price OR High Return, then very likely the buyer may be getting an un-balance ILP, which carries a higher-than-you-can-take kind of risk. In addition, such a buyer may as well;
High Protection Low Investment ~~> Buy Term Insurance
Low Protection High Investment ~~> Buy Mutual Fund
The justifying detail factors may be too much to share here but generally in developed nations, one can expect to use 0.8 to 0.9 times of traditional insurance premium to achieve a good balance ILP. However, in developing nations, one may need to use 1.5 to 2x of traditional insurance premium in order to build a safe and solid ILP.

Do you agree with this rule of thumb ? Why or why not ?


TheCurious said...


Please explain on this : "However, in developing nations, one may need to use 1.5 to 2x of traditional insurance premium in order to build a safe and solid ILP.", with a solid example. Thanks a lot !

Michael Tsen said...

it could b too complicated to have a 'solid' example here :)

but generally a good ILP should have an independant investment house that is open to public assess (transparency) ...