Are you wondering if this is some kind of scam or click bait? Trust me, this was my reaction when my relative told me she recently signed up for this "investment that pays you monthly income and won't lose money". This was her exact words. You can imagine all my alarm bells ringing, not to mention my annoyance at what atrocities the creative advisory black sheeps are up to again. Yes, I jump to conclusions too!
Anyway, I wanted to say that the accusations of misselling were unfounded. There was basis in the "investment that pays you a monthly income and won't lose money".
What it really is
My relative showed me the policy documents and it turned out to be an investment-linked policy that pays a monthly dividend. Upon death, the sum assured secures the premiums paid. You might say that it's still a misrepresentation. However, that's debatable depending on how it was presented. My relative is past the retirement age and doesn't need the funds set aside in this plan. She intends to leave it for her loved ones thus has no intentions on early withdrawal. Hence, to her it's perceived as 'won't lose money'.
How Do Such Plans Work?
Basically for this type of investment linked policies, it can come in the form of lump sum or regular investment. There may or may not be a minimum investment period depending on the type of investment-linked policy selected. This form of investment linked product has to have dividend funds in their fund selection. Do note that dividend funds may pay out monthly, quarterly, semi-annually or annually. Monthly dividend funds may pay out as soon as the 2nd month after inception. Do also note that there are investment linked plans who carry funds that does not pay out dividend. It's also important to take note that not every fund that pays dividend allows it to be paid out to consumers and some funds may only have the reinvested option. Most funds have a minimum requirement on the dollar value of the dividend before they allow for pay-out option. So if your initial investment amount generates a dividend payout that is below the minimum payout value, the dividend will be automatically re-invested. One key feature of investment linked policies include it being not principal guaranteed, the price fluctuates with the fund performance. Above all, there are charges. Some investment linked policies only carries an upfront charge and fund management fees. Others have on-going charges on top of fund management fees.
Are such plans attractive?
It's attractive if you want to get dividend payouts and if you are like my relative who has no intention to withdraw the capital till she passes on. A young person who wants to get dividend payouts but also want the death benefit as an added insurance option may also find such plans attractive. If you are holding a unit trust fund that is also available in the investment-linked policy fund selection as a feeder fund, you essentially might pay the same upfront fees but your unit trust has no death benefit. In order words, beneficiaries of that particular unit trust's owner will be subjected to price fluctuations and not a guaranteed death benefit.
So What's the Catch?
The fund selection for investment-linked policies are usually a lot lesser than the fund selection on mutual funds platforms
The charges for some of these investment-linked policies may be higher than a mutual fund in the short term
If you are not intending to hold the fund till death, your capital is subjected to price movements which means that you might lose money. It is NOT CAPITAL GUARANTEED!
This type of investment-linked policies are not used for protection planning as the death benefit can be as low as 100% of premiums paid or slightly higher.
The dividends paid out from funds are never guaranteed. At best, you can check for past performance and consistency of payouts. Past performance are not indicative of future performances.
Summary
Investment-linked policies offer a guarantee on the capital invested only upon death through the sum assured. People who use this method of investing primarily do so for dividend payouts and are certain they do not need the capital in their lifetime. In such instances, it can benefit individuals because they get a monthly stream of income while ensuring that their capital remains intact through the death benefit which will be nominated to their loved ones. This strategy is highly risky if there's a good chance the policy owner might need to withdraw the principal amount while they are still alive as the capital is subjected to prevailing prices and losses might be incurred.
If you would like to find out more about the type of investment linked policy shared, please speak to a trusted advisor. You can also drop me a message as I specialize in retirement planning and expense replacement strategies.
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Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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