4 misconceptions about investment-linked policies you must get rid of today
An investment linked policy (ILP) is a plan that provides the individual with life coverage along with investment component. Many individuals invest in ILPs as they offer them the best of both worlds. However, some are a bit sceptical and prefer to keep their wealth accumulation goals distinct from their insurance plans. Unfortunately for these people, their scepticism may be holding them back from benefiting from one of the most powerful financial tools available in the market. Hence, to prevent you from losing out on the benefits that ILPs can provide, take a look at the 4 common misconceptions about ILPs.
You will be locked into a sub-fund: Besides providing basic insurance protection coverage, an investment linked policy (ILP) has an investment component. The premiums you paid are used to pay for one or more sub-funds of your choice, according to your risk appetite. However, one of the most common misconceptions is that people are unable to make changes to their fund portfolios if their chosen sub-funds failed to meet their investment targets or when they have a change in financial goals. This is not true! ILPs allow you to switch your choice of sub-funds when needed. Some ILPs allow unlimited fund switching at no charge while some will impose a ‘switching charge’ or limit the number of times you can switch for free. You will pay more premiums as you get older: The investment linked policy (ILP) takes a cut from your premium to cover the life insurance aspect of the policy. Since life insurance premiums increase with age, there is a misconception that the premiums you pay will increase over the years. This is not true. As you get older, the amount of premium that you pay will not increase, just that a larger portion of it will go towards maintaining your coverage. This means that the proportion of your premium that will be used to purchase sub-fund units will decrease. However, certain ILPs allow you to invest 100% of your premium without paying any insurance charges while still covering you against death and terminal illness. You can invest in these ILPs according to the type of coverage required.
It is a risky investment move: Many people consider investing in an investment linked policy risky as they generally do not have any guaranteed cash values. The value of your policy depends on how the portfolio of your sub-funds performs. In simple words, the value of your ILP can take a hit and even reach zero if your sub-funds do not perform well. While this certainly holds for certain ILPs offered, ILPs are not high risk in the long term. With a long term horizon of 15 to 20 years, an ILP will be able to ride out market fluctuations. You cannot measure the performance of your investment: Many people believe that it is a challenge to measure the performance of your investment. However, it is not a challenge at all! Many insurance companies provide fund reports that document the performance of your investment linked policy sub-fund on an annual basis. This can help you judge if the investment meets your objectives. You can also get in touch with your financial consultant or fund manager for any further questions or queries. You should avoid these misconceptions and research on these policies and decide whether they are suitable for your financial needs.
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