Investment Linked Insurance Policy = Investment + Insurance?

4. WHAT YOU MUST KNOW?

Finally, we are going to discuss about how Investment Linked Policies work. In order to explain this, I have prepared the following chart for your reference. If you can understand this chart, you will have clear understanding about ILP. What is represented in this graph is basically information extracted from the table earlier.

1. Please note that X-Axis represents “Value in Ringgit Malaysia” and Y-Axis represents “Time in Year(s)”.
2. Red Dotted Line represents “Cost of Insurance”¹ (COI). It increases with time because when we get older, our health risk is higher and therefore Insurers will charge us higher COI. This COI increases with age disregard at which age you are entering into the policy with exception to new born baby.
3. Next look at the Green Dotted Line. This is the Premium you are paying throughout the policy years. You can see that it remain unchanged throughout the years. How is this possible when the COI is increasing over time?
4. The answer to the above question is the Blue Area which is the Cash Value / Account Value. Note that in the early years, the premium paid is more that COI. After deducting the COI and other charges, the balance will be invested into Units (Same as Unit Trust) and kept in the account. The balance in the account will be policy holder’s account value / cash value.
5. There will be a point when Premium paid is equivalent to COI and we would like to name this as Critical Point (Blue Dotted Line). After this Critical Point, our premium is not enough to pay for COI. This is when the Units in Account will be sold to subsidy our COI. Hence, the account value will start to decrease. The amount is expected to drop drastically toward the later years of the policy as COI will increase drastically during these years.
6. When the Account Value drops to zero, this is when your ILP ends. This Red Cross also represents the sustainability period of an ILP.
7. If the policy is renewable up to age 100 and by the account value drop to zero by age 65, can we still renew the policy? – YES, if the policy holder is ready to pay the actually COI and all other charges. It may be a lot higher than your initial premium and it will keep increasing with time. So, even it can be done, it is not really viable for policy holders to do that.

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