Despite the fact that investment linked insurance policy sounds like going against the concept of using insurance for sole protection purpose, it is still the first policy anyone should get due to a balance between cost versus feature. But this type of of insurance policy is not without its complexities which confuses many, due to its design flexibility. A member of AskCF.com, my premium membership site (where I answer members’ questions no holds barred), asked what is the rider known as waiver of premium and what is top up premium. Without understanding how an investment linked policy, explaining these 2 terms per se is really futile. In this video, I could share on how an ILP works using one diagram. Yeap, just one simple diagram.
Basically, premium paid is used to cover both insurance charges and agent or advisor’s commission for the first 6 years after policy inception. The remaining balance is then channelled into your “cash reservoir” aka cash value – where insurance company will invest this money into fund(s) managed by them. You can choose which fund to invest in, and you can even switch – much like unit trust funds. Your cash value will then really build up after the sixth year when agent or advisor not long earns commission from your premiums paid. Since you are really paying a level premium, the “allocated premium” which is channelled into your “cash reservoir” will gradually decrease as you age when your insurance charges increase.
When the cash value has been depleted, 2 things will happen. Either – or. You will need to pay the insurance charges (which increases y.o.y) to ensure the policy is still in force. If you don’t, your policy will lapse.
This normally happens when you are at your twilight years. Not definitely, but likely. Again it depends on a lot of factors. Like the investment return of your cash value over the long years.
To mitigate the risks of this happening when you probably need it most (especially if your policy has medical card), it is advisable to periodically dump in lump sum amount into your cash value reservoir. Say one or two thousand a year, if you can afford it. This is what is meant by top up premium. Or you could commit to paying a higher premium every year but I don’t know if anyone are keen to pay a lot of premiums to their insurance policy. There’s more than life and personal finance than just insurance, right?
The second part of this Revelation series contain real sales figures and quotations from 2 insurance companies. These are only available for members inside AskCF.com HERE
If you wonder where is the Episode 3 of Revelation Series, go to here – Restructuring Investment Linked Policy