What "sustainability" of an ILP means and why cover can lapse when markets fall
An investment-linked policy can lose its life cover even while premiums are paid on time, if the sub-fund underperforms. Here is the mechanism, and how to check your own policy.
An investment-linked policy, or ILP, is sold as a single product but is really two mechanisms bolted together: a life insurance charge and an investment account, both funded from the same premium. Most buyers understand the investment side. Fewer understand that the insurance side can quietly eat through the investment side until there is nothing left to eat, at which point the policy lapses. This is what advisers mean when they talk about an ILP's "sustainability", and it has nothing to do with how the underlying fund invests in green assets.
How the two halves work together
Every premium you pay buys units in one or more sub-funds you have chosen. Some of those units are then sold each month to cover the cost of insurance and other charges, and the rest stay invested. Because the price of a unit tracks the sub-fund's performance, the value of your policy is not fixed the way a traditional whole life policy's cash value is. There is usually no guaranteed cash value at all.
The insurance charge itself is not fixed either. It rises every year, because the underlying cost of covering death, disability and sometimes critical illness climbs as you age. Your premium, by contrast, is often set to stay level. The gap between a flat premium and a rising cost of insurance is bridged by selling more units over time, which is fine as long as the sub-fund has grown enough to keep supplying them.
Where sustainability breaks down
Two things have to go right for an ILP to stay in force for as long as you intend: the sub-fund has to perform reasonably, and the insurance charges have to stay within what the fund can support. When markets fall, or a sub-fund simply underperforms for a stretch of years, the unit value shrinks at the same time as more units are being sold to pay a rising insurance charge. If this continues, the policy can reach a point where there are not enough units left to cover the next charge.
At that point you are asked to top up your premium in cash, or to reduce your sum assured so the insurance charge falls back within what the fund can pay for. If neither happens, the policy lapses and the cover ends, even though you never missed a premium payment. This is the specific risk that does not exist with term insurance, where the premium (though it rises at each renewal) is not linked to a fund that can fall in value.
What your annual statement is telling you
Insurers are required to send ILP policyholders a statement, typically once a year, showing the units held, the transactions for the period, and the charges taken out through the sale of units. This is the document to read if you want to know whether your policy is on track. A statement that shows unit value falling faster than premiums coming in is an early warning, not something to file away unread.
Three practical levers exist if a review raises concern:
- Top up the premium. A cash injection restores the buffer of units available to pay future charges.
- Reduce the sum assured. Lower coverage costs less each year, which slows the rate at which units are sold.
- Switch sub-funds. Most insurers allow a limited number of free switches a year; moving to a fund that better matches your risk profile and time horizon can help, though it does not undo past losses.
Is an ILP still the right tool?
If your main goal is protection and you are uneasy about a benefit that depends on fund performance, it is worth comparing what a term policy would cost for the same sum assured. Term insurance is unbundled, has no cash value, and its premium does not depend on investment returns, which makes its cost more predictable even though it does not build savings. An ILP can suit someone who wants flexibility to vary coverage and investment together, provided they are prepared to review the statement each year and top up or adjust when the fund is not keeping pace.
Anyone holding an ILP bought some years ago, especially one taken out when interest rates and market conditions were different, should treat the annual review as non-negotiable rather than optional. Our gap check can help you see how an ILP's protection component compares with what a term policy of the same sum assured would cost.
Talk to an advisor
Whether your ILP is still sustainable depends on numbers specific to your policy: current unit value, projected charges, and your own risk tolerance. A licensed advisor can read your latest statement with you and lay out the top-up, reduction or switch options in plain terms. Use the portal's advisor matching to find one, or ask our assistant to help you understand your statement before that conversation.
Sources
This content is educational information from a licensed advisor, not financial advice. Product details vary by insurer — verify specifics with an advisor.
