22 September 2014

Minimum Guaranteed Returns for Investment-Linked Policy? Good or Bad?

Published on newspaper recently, it was reported that sources said NAMLIFA had highlighted the need to have a minimum guaranteed sum to protect policy holders of ILPs. Is it work-able? If yes, how to work it out?

Everyone knows what is Investment-Linked Plan (ILP)?

Basically, an ILP have both protection and investment element inside one plan. It gives the flexibility to policy holders to adjust the benefits and investment part. Unlike traditional life policies, how much policy value in an ILPs depends on the performance of the underlying funds being chosen. Since policy holder is the one who shoulder the risk, the ILPs premium tends to be cheaper. The key disadvantage of ILPs was the return was not guaranteed.

How about a Minimum Guaranteed Returns?
To eliminate the investment risk associated of an ILP, NAMLIFA has proposed to the central bank to have such minimum guaranteed return. And, the minimum guaranteed return they're looking at is between current fixed deposit and EPF rate (3% - 6%).

How to guaranteed the return?
After figuring out, maybe there is two ways:

  1. The ILP funds adjust their asset allocation to match the minimum guaranteed returns. Just like EPF who guaranteed a minimum of 2.5% annual return, EPF is placing 50-60% of its funds into very safe instruments such as MGS and Government bonds.

  2. Charge higher premium to compensate the insurer. This is because it's a liability to the insurers to guaranteed certain return. In the market, some insurers are currently imposing a "guaranteed charge" on policies which have guaranteed return.

Good or Bad?
Given the two possible ways shown above to guaranteed certain return, we should realized that everything come at a cost. The question is who is going to bear the cost of guaranteed. The intention behind is good, but the outcome may not be good. Currently, policy holder chose traditional policies if they want some guaranteed return. Otherwise, they can choose ILPs because of its flexibility and cheaper premium.

That's why, it's advisable to consult a financial planner before buying a plan. Thanks.

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