Investment-Linked Insurance vs. Traditional Life Insurance: How to Find the One for You

May 10, 2023
Investor's Guide

Investment-Linked Insurance vs. Traditional Life Insurance: How to Find the One for You

investment-linked insurance vs. traditional life insurance: how to find the one for you

It's no secret that protecting your loved ones is a top priority. That's why life insurance is a vital asset to have. It provides valuable security and peace of mind for your family's future. However, navigating the common types of investment insurance policies that exist can be confusing. To find what best fits your specific needs, it can be helpful to consider the facts. Investment-linked and traditional life insurance are two popular options - let's compare the two to help you pick the policy that meets your needs.

What is an Investment-Linked Insurance Policy?

Investment-linked insurance (ILI) is a combination of life insurance and investment components. With ILI, a specified percentage of the premium you pay will be used for life insurance coverage, while the rest will be invested in a portfolio of stock, bonds, and mutual funds managed by the insurance company.

Investment-linked insurance can offer higher returns than a traditional life insurance policy. But it also carries more risk, as your investment's value can go up or down depending on the market. 

What is a Traditional Life Insurance Policy? 

Traditional life insurance policies, on the other hand, provide coverage without any investment element. This means that, when you pay your premiums, the entire amount goes towards life insurance protection. No part of it is put towards investments.

Traditional life insurance plans in the Philippines offer stability - the value of your policy is guaranteed to remain the same, so long as you keep up with the premiums. This makes them a great option for those who are looking for predictable returns and low risk. However, these returns may be lower than what you can expect from an ILI policy. 

Investment-Linked Insurance vs. Traditional Life Insurance: Which is Right for You? 

When it comes to selecting between Investment-Linked Insurance (ILI) and traditional life insurance, it all boils down to your individual investment goals, risk appetite, and financial circumstances. If you're comfortable with taking on greater risks for the possibility of higher returns, ILI may be the ideal solution. Otherwise, if stability is more important to you, then traditional life insurance might be a better alternative. 

Before deciding which one to get, remember to take into account your financial situation. ILI policies may come with higher fees and charges - so make sure you can cover the extra costs. If you already have a diverse investment portfolio, traditional life insurance may be the smarter choice. 

How to Choose Between Investment-Linked Insurance and Traditional Life Insurance 

Let's take a look at some essential factors that you should consider while selecting between investment-linked and traditional life insurance. 

1. Your Financial Goals 

When weighing up Investment-Linked Insurance (ILI) versus traditional life insurance, the most important factor to consider is understanding your own financial goals. Traditional life insurance is great for ensuring your family's security and providing a guaranteed return in case of unexpected circumstances. Plus, it offers lifelong coverage and accumulates cash value over time. 

On the flip side, if you're looking for investment opportunities alongside securing your family's future, Investment-Linked Insurance (ILI) may be the better option. ILI plans allocate portions of your premiums to various funds and have a higher risk appetite - potentially resulting in greater returns over time. 

2. Consider Flexibility 

When choosing between Investment-Linked Insurance (ILI) and traditional life insurance, it is important to take into account the level of flexibility they offer. Unlike traditional life insurance, which is rigid when it comes to modifications or adjustments within the policy, such as alterations to beneficiaries or coverage limits, ILI is much more flexible. It provides the option to tweak the policy as needed, including changing the amount of coverage, risk level, and fund allocation.

Going beyond that, Investment-Linked Insurance (ILI) offers the option to cease or continue with your policy based on your investments' performance without sacrificing the value of your premium payments. If you want more freedom and control over your investments, ILI might be a more suitable choice. 

3. Understand the Cost Structure 

Many people believe that Investment-Linked Insurance (ILI) is pricier compared to traditional life insurance, but this is a misconception. The pricing structures for both insurance types are highly variable and influenced by several factors like level of coverage, type of plan, investment performance, and age.

As a rule, traditional life insurance has fixed, lower premiums that remain constant throughout the policy. On the other hand, premiums for Investment-Linked Insurance (ILI) can fluctuate depending on the market performance of the designated funds. Having an awareness of and discerning the total cost of each option is imperative before deciding which way to go.

4. Evaluate the Risk Factor 

Risk is always associated with any kind of investment, no matter how properly designed the plan is. Traditional life insurance typically has lower risk due to the guaranteed no-risk nature of the product. On the other hand, Investment-Linked Insurance (ILI) carries a higher risk as its performance depends on the funds that are chosen for investment. 

If you have a higher risk appetite and can tolerate market volatility, investment-linked insurance may suit you better. On the other hand, if you prefer low-risk investments and want a lifetime guarantee with your policy, then traditional life insurance might be the better option for you.

5. Talk to a Financial Advisor 

Making the right decision between investment-linked insurance vs. traditional life insurance primarily depends on your financial goals, risk appetite, and budget. It is important to have the guidance of a professional financial advisor who can assess your current financial situation and offer tailored advice to help you make informed decisions that align with your objectives.

A competent financial advisor can provide you with all relevant insights concerning both policies and walk you through the advantages and drawbacks of each. They will also evaluate your current situation, suggest investments that suit your requirements, and create a comprehensive strategy to help you achieve your long-term goals. 

Once armed with expert advice, you'll be better equipped to make the right choice between investment-linked insurance vs traditional life insurance. 

Choosing the right life insurance in the Philippines is an important decision. ILI and traditional life insurance both have their advantages, so it’s important to weigh the pros and cons before making a decision. Remember, the best policy is one that provides the coverage and investment returns you need, while also fitting within your budget and long-term financial plans.

InLife's Financial Advisors know best the difference of investment-linked insurance and traditional life insurance. Reach out to our team, and they will help you decide which type of investment plan in the Philippines  is best suited for your lifestyle.

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