Features of Investment -linked Insurance

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The rates of return of traditional cash value policies such as whole life and endowment have been considered not competitive to the policyholders. To be competitive with other financial institutions, the investment-linked insurance have been introduced with the following features.

1. Variety of investment
Unlike the traditional cash value policies where the investment of the cash value is restricted to a certain limit allowable in each type of investment, investment-linked insurance provides the policyholders with a variety of choices in investing their cash value. Various funds such as aggressive stock fund, income bond fund, balanced fund, global fund, cash fund, real estate fund and money market fund are available to the policyholders. The choice would depend on teh return policyholders wish to achieve to meet their financial goals and needs as well as their tolerance for risk.

2. Unbundling 
Unlike the traditional cash value policies, the following three components under investment-linked insurance are not bundled together but are separated:

  • savings component
  • protection component
  • expense component
The unbundling of these 3 components makes each component transparent to policyholders. Policyholders receive annual statements disclosing the premiums paid during the previous year, the death benefit, and cash value available at the end of the previous year. The annual statement also shows the movement of the cash value as a result of the premiums received and the number and value of investment units bought and sold, mortality charges for the cost of insurance, expenses charged for sales and administrative costs incurred during the year. 

3. Flexibility

In comparison with the traditional cash value insurance, policyholders of investment-linked insurance have more flexiblity as follows: a. Premiums can be changed or skipped so long as the cash value is sufficient to pay for the mortality and expense charges. b. Death benefit can be changed from one level to another up to a limit subject to evidence of insurability. c. Withdrawal of the cash value can be made from time to time. d. Premium top-ups can also be made from time to time to increase the cash value. 

Since policyholders are given the flexiblity to skip premiums, a lack of firm commitment to pay premium may occur. The policy may lapse due to non-payment of premiums. To overcome this problem, life insurance companies will recommend a target premium with a minimum amount for policyholders to pay regularly.