Features and Risks of investment-linked life insurance
If you are considering purchasing any unit-linked life insurance product, you should first read the sales documents (including the “Product Information Summary”) and the “Important Information Statement” to understand the features and risks of the product. Generally speaking, investment-linked life insurance products have the following features and risks:
- Investment-linked life insurance is a long-term policy issued by an insurance company. Therefore, your investment and insurance protection are subject to the credit risk of the insurance company.
- Investment-linked life insurance is designed for investors who are prepared to hold their investments for the long term. If the policy is surrendered in the early stages of the policy, the surrender charge may be quite high and may result in a significant loss of premiums paid. If you are not prepared to hold the policy for longer than the expected minimum holding period, purchasing a life insurance policy and investing in separate funds may be a better option.
- Generally speaking, unit-linked life insurance products provide a range of investment options for investors to choose from and allow investors to switch among these options (switching fees may apply). These investment options correspond to underlying or reference funds, however any investment by an insurance company in the underlying or reference fund belongs to the insurance company, not you. You only own an investment-linked life insurance policy and have recourse only against the insurance company.
- The policy value (and return) of unit-linked life insurance is linked to the performance of the investment options chosen by the policyholder, so there is a risk of principal loss. The hypothetical rate of return shown in the surrender document is only a hypothetical number for illustrative purposes, and the actual return may fluctuate significantly or even be negative (i.e., a loss). You should not make investment decisions based on the assumed investment rate of return in the surrender documentation.
- If the death benefit of an investment-linked life insurance policy is linked to the policy value (for example, a fixed 105% investment-linked life insurance policy), the death benefit protection may be very low if the fund corresponding to the investment option you choose does not perform well.
- Since insurance companies charge different fees and charges for ILAS policies, the overall returns from ILICs will be lower than those from direct investment in the underlying/reference funds.
- Upfront costs reduce the amount of premium available for investment, especially early in the policy. In some cases, these fees and charges may be quite high.
- If you meet certain requirements, such as holding the policy for a certain term, your policy may be eligible for long-term customer incentives or special incentives.
- Some unit-linked life insurance products provide high life protection. As the insured gets older, or because the funds corresponding to the selected investment options experience losses, the relevant insurance costs may increase significantly during the policy term. The insurance premium will be deducted from the account value of your investment-linked life insurance policy, which means the amount of money available for investment in the policy will be reduced. In addition, some investment-linked life insurance policies that provide high life protection (such as protection-type investment-linked life insurance) will no longer cease to exist when the insured reaches the age of 65 (or at the age specified in the relevant protection-type investment-linked life insurance sales documents). High life cover is provided, so the death benefit benefit may be significantly reduced.
- Reducing or suspending contributions (during a contribution holiday) or withdrawing funds from the policy may significantly reduce the value of an ILAS policy, but all fees and charges will still be deducted. If the underlying or reference funds perform poorly, investment losses may be further amplified. If the value of the unit-linked life insurance policy is insufficient to cover all recurring fees and charges, the unit-linked life insurance policy may be terminated early and you may lose all contributions and benefits paid.
- The characteristics and risk levels of the investment options provided by unit-linked life insurance products may vary greatly, and some may be high-risk. You should read the sales documents of unit-linked life insurance products and related or reference funds to understand the detailed information of different related or reference funds, including investment objectives and strategies, risk factors and charges, etc.
- Some of the underlying investments may be denominated in different currencies than the unit-linked life insurance policy, so the investment returns of the policy may involve exchange rate risks.
