Investment-linked insurance: Combining the best of protection and investment

A retirement plan can seem remote and distant for the young. Yet, effective use of wealth management tools and an early start in saving for our retired life do give us a head start in achieving our goals and enjoying lives.

Investment-linked insurance: ideal for the young
For younger readers, the returns of relatively low-risk products might not match their expectations. Wealth management for the young means building wealth as early as possible. As such, higher risks for higher returns are not too much of an issue. This is why more young people are taking part in investment activities in recent years: wealth is accumulated through monthly contributions on investment tools such as stocks, funds and similar products. While it makes no harm for young people to invest early, protection needs should not be neglected. If we lose our ability of work as a result of an accident, our plans would be significantly affected, not to mention the relevant medical expenses involved.

Amongst various products available in the market, I think investment-linked insurance products are the most suitable means for young people to save for their retirement. Investmentlinked insurance products are a type of insurance solution, but they are different from traditional life insurance products. Policyholders of traditional life insurance pay a premium and the insurance company provides protection in return. Investment-linked insurance products, however, emphasise on investment returns: premiums paid by policyholders are used to purchase unit funds of their choice, and the returns are reflected by fund performance. In short, these products can be seen as a combination of insurance and investment.

Products becoming more investment oriented
Investment-linked insurance products have undergone certain changes as they evolve. In the early days, policyholders of these products are provided with a fixed amount as their life protection. In the case of death, the policy’s beneficiary will be entitled to the claims of this protection amount or the total value of the investment funds, whichever is higher. Part of the monthly contributions paid by the policyholder is used to pay the policy’s premium, and the remainder is used for fund investment.

In the past few years, certain investment linked insurance products have become investment-oriented. The protection amount of these products is represented by the value of the investment fund. All of the premium, after deducting certain administration fees, will be fully vested on investment funds, such that policyholders can accumulate their wealth through dollar cost averaging. In the early days of investment-linked insurance plans, only less than 10 funds were on offer for policyholder’s selection. The number of funds available over the past few years has surged to a few dozens, or even over 100 – they now cover most of the investment market.

Making investments while enjoying personal protection
Readers might question, as far as saving is concerned, what is the point of investing through insurance instead of making direct fund investments? After all, banks do offer quite a wide selection of monthly fund investment plans. To answer this question, let me illustrate the differences with a simple comparison. First of all, the choices available for a monthly fund plan might not match with investment-linked insurances: as the amount involved in a monthly plan is relatively small and the administration fees are comparatively higher, there are only limited funds to choose from the investment market. On the contrary, as insurance companies have contracts with fund houses, policyholders can use very little money to buy funds of their choice. Moreover, insurance companies can regularly review the funds portfolio, adding different alternatives to meet market needs. In terms of choice, investment-linked insurance do offer a better variety of funds.

In addition, a subscription fee is charged as customers purchase funds. In the extended period of investment, we usually need to switch funds to cope with changes in the market. This would, again require switching fees, even when the switch is done with the same fund house. As a result, the cost for investment becomes higher. At present, most investment linked insurance products do not charge subscription fees or switching fees, nor would
they limit the number of changes on the fund portfolio. This provides higher flexibilities for the policyholder. Although policyholders still need to pay administration fees on investment-linked insurance products, I still consider it worth it for the overall flexibility they offer.

The most important of all, is the protection provided by investment-linked insurance products. I want to stress that personal protection should not be ignored as we invest. Investment-linked insurance products are able to achieve such an effect. Most investmentlinked insurance products do not only provide life protection, but also other additional benefits, for example, waiver of premium on disability benefit and payor’s benefit, etc. With
the waiver of premium on disability benefit, the insurance company will pay future premiums on behalf of the policyholder until the end of the premium payment period in the unfortunate event that the policyholder becomes permanently disabled, easing the policyholder from worries behind. The payor’s benefit, on the other hand, are tailored for policies taken out to cover a child aged 18 or under. In the event of death or disability of the payor, future premiums will be paid by the insurance company to ensure policy continuation, and to provide the payor’s child with an extra level of protection.

Jim Costello, Director and Head of Wealth Insurance, HSBC