How an investment-linked policy is priced: units, charges and the protection cost

An investment-linked policy (ILP) is the one life product where the price is not a single number. There is no fixed premium for a fixed benefit. Instead, money goes in, is converted into units of one or more sub-funds, and a stream of charges is taken out by selling units. What you end up with depends on what the funds do and on how many units the charges consume along the way. This guide walks through that mechanism so that an ILP illustration reads as a set of moving parts rather than a wall of numbers.

Step one: premium becomes units

MoneySense describes the basic flow. Your premium buys units in the sub-funds you have chosen. The price of a unit moves with the value of the fund's underlying investments, so the value of your holding rises and falls with the market. There is no guaranteed cash value; the LIA glossary is explicit that the cash value of an ILP is whatever the units are currently worth.

Not every dollar of premium is necessarily invested at once. Some regular-premium plans allocate only a percentage of early premiums to units, or offset that with "bonus units" added at the start. Etiqa's Invest flex pro, for example, advertises a start-up bonus of up to 55 percent on a plan from S$200 a month. A bonus of that kind is not free money; it is a design choice that interacts with the charges taken later, so read the product summary to see the net effect over the years you plan to hold the policy.

Step two: units are sold to pay charges

This is the part that surprises first-time buyers. The insurer does not send you a bill for fees. It sells units from your account to pay them. The typical charges are:

• Insurance charges, sometimes called mortality or cost-of-insurance charges, which pay for the death and disability cover.
• Fund management charges, deducted within the fund as a percentage of assets each year. Tiq Invest, a digital single-premium plan, publishes a 0.75 percent a year management charge as its headline figure.
• Policy or administration fees, usually a flat monthly amount.
• Switching fees once you exceed the free switches most insurers allow.
• Surrender or withdrawal charges in the early years of regular-premium plans, which is why MoneySense describes ILPs as suited to longer horizons that can absorb initial costs.

Because the charges are met by selling units, a charge is not a fixed cost in dollars but a claim on a share of your holding. In a falling market the same dollar charge consumes more units.

Step three: the protection cost rises with age

Insurance charges are the moving part that matters most on a plan with meaningful cover. MoneySense explains that the cost of insurance typically increases every year, because the risk of death or illness rises with age, even if the sum assured stays the same. Your monthly premium does not rise, so an increasing number of units is sold each year to meet the charge.

Two consequences follow. First, fewer units remain invested, so the policy accumulates less than the headline premium suggests. Second, if the sub-fund performs poorly and the cover is high, the account can run short of units to pay the charge. At that point the insurer will ask you to top up the premium or reduce the sum assured. MoneySense also notes that insurers may raise insurance charges for an entire class of policies if claims experience deteriorates, and that ILPs usually have no guaranteed cash value, so the whole investment can in principle be lost.

What the death benefit is made of

The benefit paid on death is usually the higher of the sum assured and the value of the units, or some combination. Tiq Invest, for example, pays the higher of the account value and 105 percent of the premiums paid less withdrawals. Where the sum assured is close to the account value, you are paying very little for insurance; where it is far above, the insurance charge is doing real work and rising each year.

Reading an illustration

An ILP benefit illustration shows projected values at two assumed rates of return, and the LIA glossary notes that a policy illustration sets out both guaranteed and non-guaranteed benefits together with costs, including the cost of distribution. Focus on three lines:

1. Total charges over time, expressed as the difference between the projected value with and without charges. This is the true price of the policy.
2. Surrender value in the early years, which shows how much you would lose by stopping.
3. The insurance charge schedule, which shows how much of each year's premium is going to protection rather than investment as you age.

Then compare the same sub-fund, or a similar one, bought as a unit trust without the insurance wrapper. MoneySense suggests this comparison directly. If protection is your main aim, it also points out that term insurance can provide more cover for less.

Checking a plan against your needs

Before signing, confirm the following from the product summary rather than the brochure:

• What percentage of each year's premium is allocated to units.
• The insurance charge at your current age and at ages 50, 60 and 70.
• Fund management charges for the specific sub-funds you have chosen.
• Any surrender charge schedule and lock-in period.
• Whether the plan is a Specified Investment Product, which affects the suitability checks your adviser must complete.

You can see the ILPs currently listed at /compare/singapore/life, and the coverage gap check helps you work out how much of the plan should be protection rather than investment.

Talk to an advisor

ILP charges are easy to underestimate and hard to reverse once a plan is in force. A licensed adviser can walk through the illustration line by line and compare it against a term plan plus a separate investment. Use the portal's matching to find one who works on investment-linked plans, or ask our assistant to explain any charge on an illustration you have received.

Sources

• MoneySense — Understanding investment-linked insurance policies
• LIA — Insurance terms
• Tiq Invest product page
• Etiqa Invest flex pro product page