Investment-Linked vs Traditional Insurance Products: A Guide to Making Informed Choices
In today's complex world of financial demands, ambitions, and responsibilities, comprehensive insurance coverage is more necessary than ever.
Both traditional insurance and investment-linked insurance provide families with a consistent source of income in the event of the policyholder's death or the end of a specific period.
However, they have several key differences, despite their ability to help families achieve long-term goals, accumulate wealth, and leave a legacy for future generations.
What is the difference between traditional insurance and investment-linked insurance?
In order to protect themselves from unforeseen events, Malaysian families require complete insurance coverage. This can either come in the form of traditional insurance or investment-linked insurance.
However, it’s imperative to understand what they both entail in terms of distinct features, benefits, and drawbacks.
Traditional insurance
Traditional insurance, also called whole life insurance, is life insurance coverage that offers the policyholder and their beneficiaries assured financial security. Here are some features of traditional insurance:
Lifetime coverage
Traditional insurance offers coverage throughout the policyholder's complete lifetime as long as the premium payments are regularly paid. In essence, it aims to guarantee beneficiaries a death benefit at any time after the policyholder passes away.
For families looking for long-term financial security, it offers an easy way to pay off debt, replace lost income, or meet ongoing needs if a breadwinner dies.
Cash value accumulation
Another trait of traditional insurance is its accumulation of financial value. In practice, a portion of each premium payment is set aside as the insurance matures and progressively accrues as cash value.
This cash value can be utilised by the policyholder as a source of funds, growing at a guaranteed pace set by the insurer. This accrued value is eventually accessible by policy withdrawals, offering a source of money when needed.
Fixed premium
Traditional insurance policies conventionally come with fixed premium payments that remain consistent throughout the policy’s duration. This fixed premium structure gives policyholders the stability and predictability needed to overcome uncertainty as there is an exact cost required to maintain the coverage.
In practice, the premium is calculated based on several factors. For instance, the policyholder’s age, health, and the desired coverage amount at the time of purchase.
Overall, this predictability is particularly appealing to those who seek a straightforward, consistent financial commitment without the uncertainty of changing premiums.
Investment-linked insurance
Insurance products that combine life insurance coverage and an investing component are known as investment-linked insurance (ILP). The key features that set ILPs apart are:
Investment component
ILP has a distinct investing component. A percentage of the premiums paid by the policyholder is invested in different investment funds, like bonds, mixed-asset portfolios, or stocks.
This structure offers policyholders the potential for higher returns on their investments compared to traditional insurance, depending on the continual performance of the chosen funds.
Market linked returns
Unlike traditional insurance, which provides a guaranteed cash value accumulation, investment-linked insurance offers returns directly linked to the performance of the underlying investments in the bond or stock market.
This means that policyholders have the potential to achieve higher returns. However, they also bear the risk of market fluctuations. In essence, the value of the investment component may increase or decrease based on market conditions.
Thus, this makes investment-linked insurance a well-suited option for those willing to accept a certain level of risk in exchange for the opportunity for greater growth.
Flexibility
Investment-linked policies offer more flexibility than traditional insurance. Policyholders can adjust their coverage levels, switch between disparate investment funds, and even modify their premium payments to align with their financial goals and market conditions.
This flexibility enables policyholders to actively participate in managing their insurance and investment strategies, adapting to changes in personal circumstances, risk tolerance, or market trends. Such adaptability is attractive to individuals who prefer to have more control over their financial planning.
Option to withdraw
A major advantage of ILP is the ability to make partial withdrawals from the investment component. This unique feature provides liquidity, allowing policyholders to access their funds if needed without fully surrendering the policy.
However, such withdrawals may reduce the policy's compounding value and potentially impacting the policy’sbenefit— especially if done frequently or in large amounts.
How to choose between investment-linked vs traditional insurance products?
Since we have unpacked the features that differentiate traditional insurance and investment-linked insurance products in Malaysia, let's determine what to consider when selecting between them.
Financial goals
Knowing one’s financial objectives is mission-critical when deliberating between traditional insurance and investment-linked insurance. Since traditional insurance offers lifetime coverage and a fixed payout to beneficiaries upon the policyholder's death, it’s arguably the best option for people looking for stability and assured returns.
Investment-linked insurance, on the other hand, is better suited to individuals whose financial objectives encompass both wealth creation and insurance protection.
ILP plans allow policyholders to increase their assets while maintaining life insurance coverage by allocating a portion of premiums to investment funds that may eventually generate higher returns. Consequently, one's decision matches one's long-term financial goals.
Risk tolerance
Because traditional insurance offers peace of mind to policyholders seeking stability and ensures a fixed sum and cash value accumulation, it carries a lesser risk. Due to this predictability, it is a desirable choice for people who seek to stay away from the uncertainties brought on by changes in the bond and stock markets.
On the flip side, ILP is largely dependent on the success of the underlying investment funds. As such, individuals may have to ascertain whether they have a higher risk appetite and can tolerate market volatility to consider investment-linked insurance.
Need for flexibility
Traditional insurance policies are more rigid, with fixed terms and conditions that may not easily accommodate changes in one’s financial situation or needs. Altering coverage amounts or beneficiaries can be extremely cumbersome and may require additional paperwork or fees.
In contrast, investment-linked insurance allows policyholders to adjust their premium payments, change investment allocations, and even switch between various funds based on their financial goals and market conditions.
This adaptability is important to consider for individuals who anticipate changes in their future financial circumstances— or just wish to take a more active role in managing their investments.
Talk to a Wealth Planner
Engaging a wealth planner is wise when choosing between both policies. A certified wealth planner can evaluate your current needs help you define your financial objectives, offering tailored guidance depending on your particular situation.
Furthermore, they are able to walk you through the decision-making process and clarify the subtle nuances between the two types of insurance, as well as their advantages and disadvantages. The right advisor choice may eventually result in a more stable financial future for you and your loved ones.
Investment-linked insurance in Malaysia
Prudential's investment-linked insurance programme, PRUWith You Plus, offers a comprehensive insurance package that includes both life insurance and investment components tailored to an individual's and their family's needs.
This plan ensures policyholders a lump sum payout in the case of a severe disease or accident-related permanent incapacity. Additionally, policyholders can choose to designate a percentage of their premiums to a range of top-notch investment funds. This enables the accumulation of money over time resulting in a secure financial future.
When life circumstances change, policyholders can also adjust their coverage and investment alternatives to align with their evolving financial goals. This makes it a flexible solution for individuals seeking to balance growth and protection.
PRUWith You Plus also offers tools that aid policyholders on their financial journey, like cash awards for significant life events. The plan's extra coverage options also allow families to tailor their insurance to specific needs, such as their kids' education or medical expenses.
Conclusion
Both traditional insurance and investment-linked insurance are necessary to give modern families a financial cushion. By offering guaranteed returns and financial protection, traditional insurance ensures that families have a consistent source of income in the event of the policyholder's death or the end of a specific period.
On the other hand, families who choose investment-linked insurance, which combines insurance coverage with the potential to build wealth, can expand their assets while maintaining their life insurance.
Furthermore, investment-linked insurance serves as a crucial safety net in light of inflation and market volatility in today's economy. So, by incorporating investment-linked insurance into their financial planning, modern families may overcome any unanticipated challenges and accomplish their long-term financial objectives, creating a more secure future for both them and their kids according to their risk tolerance.