The best way to understand investment-link products is to contrast it with “traditional cash value” insurance.

In traditional participating whole life and endowment policies, the insurance company invests the premiums and declares bonuses yearly. You do not have a choice of how the investments are made.

In investment-link products, the insurance company offers you a few choices of product with different investments to suit your objectives, risk appetite and profile. You can choose the investments to a certain extent and you bear the risk and responsibility of making gains or losses.

The key concept of ILPs is to combine protection and investment and to make it flexible to switch from protection to insurance, and vice versa.

Traditional life insurance does not have the flexibility.

ILPs are also more transparent than traditional insurance in terms of the cost and charges.

But there are disadvantages as well such as higher charges and higher risks.

From the financial planning viewpoint, ILPs being more flexible are useful in life cycle planning. Younger couples with children need more protection but as they mature and near retirement, and their children become financially independent, they would need investment more than protection.

With the availability of unit trusts, there is the possible delinking of investment and life insurance by investing in unit trusts and taking life insurance separately.

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