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In this section, we are going to see how Mutual Fund is being applied in an investment-linked policy.

Let’s say you’ve just started an investment-linked policy with Never-Say-Die Insurance Company. This investment-linked policy provides you with a few types of funds to invest your money in. These are the available funds from Never-Say-Die Insurer.

a) Coward Fund (very secure)

b) Half-assed Fund (a balanced fund with a bit of bonds and some equity)

c) Black Jack Fund (very aggressive fund)

Let’s say you are a very aggressive investor and decides to invest in Black Jack Fund. Your premium for the policy is RM 200 a month. However, not 100% of the RM 200 you are paying will go into the fund, at least not for the first few years! The RM 200 will be split according to the terms that is stated by Never-Say-Die company, where one portion will go into the investment and the other into the administrative charges.

So how many percent of that RM 200 is going to be allocated into Black Jack Fund?

Let’s just use the following list for this discussion:-

Funds allocated for investment into Black Jack Fund.

1st Year: 40% (RM 80)

2nd Year: 50% (RM 100)

3rd Year: 80% (RM 160)

4th Year: 90% (RM 180)

5th Year: 95% (RM 190)

6th Year: 100% (RM 200)

7th Year: 100% (RM 200)

So, in other words, you are going to be paying RM 16,800 of premium for the first seven years, and only RM 13,320 will go into Black Jack Fund. The rest of the premium will be allocated for the administrative charges. Of course, after the 7th year onwards, the allocation for investment will stay put at 100%.

One very important thing to note is that the more money you have in the fund, the harder your premium is working for you. But you must always keep in mind, this is an investment and it carries with it the risk of losing money. Still remember who’s going to bear this risk? You, my dear policyholder! If you make some clean profit, congratulations! If you suffer losses from the fund, don’t blame the company, you authorized the investment, remember?

For those who are curious about the actual premium allocation for various insurance companies in Malaysia, here’s a summary breakdown for the first seven policy years.

The information might be outdated, and if you find any inaccuracies, please let me know!

This is one reason why an investment-linked is never a good idea to be used as a SAVING policy unless you are prepared to contribute extra premium which will be allocated specially for investment purposes. Similar to any investment vehicles out there, your investment funds is subject to growth and losses, based on the performance of the underlying investment activities of the funds. Hence, to ensure that your investment-linked policy meet your financial objectives, the premium allocation must be carefully planned and structured and not leave everything to chance.

So what’s going to happen to all the units that are being bought using your premium? We shall cover that together with one of the most important topics and also one that is often not clearly stated, if it’s stated at all during the sales of an investment-linked policy- Insurance Charges in an Investment-linked policy.

Stay tune!

Related articles:
Investment-Linked Insurance Policy: An Overview- Part 1
Investment-Linked Insurance Policy: How Mutual Fund Works- Part 2
Investment-Linked Insurance Policy: Premium Allocation- Part 3
Investment-Linked Insurance Policy: Insurance Charges- Final Part

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