Investment-Linked Policy: How Does It Work?

Key Points

  1. Investment-linked policies are insurance plans that contain both protection and investment elements.
  2. The most important thing to consider when picking an ILP is what you want your portfolio’s focus and protection level.
  3. One part of the premium goes to investment and another to insurance coverage.

Insurance companies are always coming up with new ways to cater for different financial needs. Investment-linked policies were revolutionary about 8 years ago and are offered by major insurers nationwide today.

Investment-linked policies are a hot topic in financial planning. Some feel that ILP and insurance should be kept separate because they serve different purposes. But others say mixing them together is okay if you know what your plan does or doesn’t cover. ILPs are a standard product for insurers to offer and have become more popular than ever before, no matter what others’ opinions are.

There are many different types of investment in Malaysia. Still, investment-linked policies (ILPs) offer a comprehensive solution to protection needs and wealth accumulation goals. You can adjust your coverage depending on what you need at any given time.

If you are interested in understanding investment-linked policies, this article is for you! You can compare this with other types of investment and make the best choice to start your investing journey today!

What is investment-linked policy?

Investment-Linked Policies, known as ILPs, are insurance plans containing protection and investment elements. ILPs are a great way to invest your money while protecting you from future financial worries. A portion of each premium goes towards life insurance coverage, and another can go into funds investment that you choose based on your risk appetite.

ILPs are a popular way for insurers to keep their account values up and ride out market volatility through top-up features. Premiums for an individual life policy can be paid in two different ways. Policyholders can choose to pay the regular premium on a monthly, quarterly, half-yearly or yearly basis; or one large sum payment at once.

For those looking to accumulate wealth over time, a long-term savings plan can help you place the funds and choices of assets that suit your risk profile. You can monitor your investment performance through yearly reports issued by the insurer. This report will include all information, including how much was allocated for premiums, relevant insurance charges associated, investment value and fund unit price.

How does it work?

The premium you pay for your insurance policy will be divided into two. One part goes to investment, and the other pays off any claims. Premium payments allow you to pay for the entire contract period in one go or at regular intervals throughout the year. Most people opt for regular premiums as they are easy to manage.

You will receive a yearly report from your insurance company that details the performance of all your investments. This includes information about the amount allocated to each type, relevant charges or fees, and the value contributed towards its end date and unit price during certain periods of active trading.

The most important thing to consider when picking an ILP is what you want your portfolio’s focus and protection level. There are three options: one that offers more significant wealth accumulation, another with a more balanced mix between the two ideas, or a protection-heavy focus.

Advantages of ILP

Below are some advantages of the investment-linked policy.

  • All-in-one coverage
  • ILPs can be highly generous with their coverage. You will find that an ILP offers you critical illness, hospitalization and death benefits. Your protection needs are met with a wide range of add-ons that can be purchased to ensure you’re fully covered.

  • Saving plan options
  • ILP plans have a saving plan that allows you to save while generating returns for your retirement.

  • Freedom and flexibility
  • You have the freedom to invest more money when you need it and enjoy the flexibility that lets your investment grow with market change. Furthermore, withdrawing from the policy is simple and can be done at any time. If you notice that your finances are becoming complex, feel free to withdraw them immediately.

  • Lower insurance charges
  • The earlier you purchase your investment-linked plan, the lower premiums are. This benefit applies if you are a fresh graduate or first-jobber.

  • Transparency
  • You can access all your transactions clearly and see where the funds go. You will also receive a monthly periodic statement that lists insurance charges, investment value or fund unit price. So, you know what’s happening with them at any given time!

Disadvantages of ILP

When there are upsides, there will be downsides.

  • Increase in premium
  • ILPs are designed to gradually increase premiums based on the policyholder’s age.

  • No guaranteed return
  • There are risks to investing in ILPs, just as with any other investment. There are no guarantees that your returns will be what you hope for. Even when companies show stellar projected growth rates at the year’s beginning, there’s nothing to guarantee such gains materialize.

  • Misconceptions
  • The argument that ILPs are just a “replacement” for your savings plan is incorrect. Some might also think that ILPs provide a guaranteed return, while some think it is not flexible enough. All these misconceptions cause misunderstandings for interested people.

Is ILP the right plan for me?

Investment-linked plans are a popular choice for investors looking to invest and protect their assets \simultaneously. Not only does the flexibility allow you to control your insurance coverage, but it also offers an opportunity to grow investments according to your risk appetite.

Investment-linked plans do not guarantee a fixed growth rate. As you grow in age, the premiums will go towards maintaining your coverage and reducing investment fund payments for older workers. Therefore, buying it when you are young results in paying less and saving more for your retirement plan.

Differences between ILP and traditional investment

ILPs are a great way to combine investment and life insurance. They offer protection from the risks of death and an opportunity for you or your loved ones’ financial needs in case something was ever going on with them!

Meanwhile, the traditional life insurance plan is a great way to ensure that you’ll be taken care of financially if something happens. It offers guaranteed amounts at the end or during your term and can build up “cash value”. This can take form in many ways depending on what they offer within this policy.


Investment-linked policies offer you the possibility of promising returns while giving protection against death. To ensure that your investment is protected and not lost, understand how these types of insurance work before starting one!

Related: Top 5 High-Risk Investments in Malaysia | Top 5 Low-Risk Investments in Malaysia

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