Published in Straits Times Online Forum
I REFER to the ongoing discussion on insurance products (Madam Lim Pueh Joo, "Investment-linked policy works best for me"; yesterday), specifically to address the "advantages" of investment-linked policies (ILP).
Madam Lim is technically correct in that once the term insurance period ends, renewal premiums will be costly if a person develops a medical condition.
However, purchasers of term insurance are not looking to renew their policies at the end of their terms.
Buying term insurance is only half of the strategy. Advocates of term insurance will save and invest the difference between the premiums of a comparable ILP policy and term policy.
Consumers who buy term insurance and invest the difference will very likely be able to accumulate their own "cash value" by the time the term policy expires.
This self-accumulated "cash value" will be at least equivalent to, if not greater than, the insurance coverage purchased.
Having a personal "cash value" is also more advantageous,because one can claim one's own money without restrictions, such as adhering to the strict definitions of 30 critical illnesses.
It is well known that ILP policies introduce many additional fees that increase their effective expense ratio.
Low-cost investment products have an expense ratio of about 0.5 per cent,
which is much lower than the ILP expense ratio. The latter may be around 2 per cent or higher. ILPs appear to be a win-win situation only because consumers are not well educated about the cheaper alternatives out there.
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