How suitable are investment-linked policies for your portfolio strategy?

OVER the past two decades, we have not used investment-linked policies (ILPs) when building investment portfolios for our clients because we do not think they are suitable. But ILPs have since evolved, and we have been asked whether we would change our stand on them.

Protection-based ILPs were first developed in the early 1990s. Similar to whole life plans, for every dollar in premiums you pay, a portion goes into covering the cost of insurance, after deducting distribution cost (commissions) and other fees; the remaining balance is invested.

But unlike whole life plans, where the cost of insurance is fixed throughout the lifetime of the policy, ILPs’ cost of insurance is charged based on your age at policy inception. This cost rises as you become older. In whole life plans, the investment portion of the premium is invested in the insurers’ life fund. In ILPs, it is invested into unit trusts.