All You Need To Know About Investment Linked Policy
An investment-linked policy refers to a form of life insurance that pays out a lump sum on death not only to cover the beneficiary’s cost of living expenses but also to provide an investment pot.
What are the benefits?
1. You can cash in a lump sum
A lump sum is paid out on death to provide financial protection for your family. By subscribing to an investment-linked policy, monthly premiums can be waived. This means that the policy’s cash value can be drawn upon to provide income and security.
2. You can enjoy tax relief
You can sometimes receive a tax relief on your monthly premiums and your beneficiary may be able to claim an inheritance tax exemption, depending on the scheme’s terms and conditions. This could give you even more financial protection for your family.
3. Your future value is locked in
Is your plan fully protected from inflation? If the answer is no, then it’s worth considering a financial product that will pay out a lump sum at retirement or on death and thereby lock in the value of your policy. However, you have to keep in mind that investment-linked policies are unlikely to lead to the near-term growth of the money invested.
4. You can borrow or access your cash value at any time
A lump sum is paid on death, but you can always borrow it from the policy or use it to help pay for a long-term plan such as pensions and share options. However, there may be a charge for this interest.
What are the drawbacks?
1. You have to invest in something
You’ll have to invest monthly payments and pay interest on your investment pot. So it won’t be easy to pay off your mortgage or save enough to buy a financial product that produces a guaranteed return, such as an annuity.
2. There are restrictions
Most investment-linked policies are designed to protect your family, so they don’t allow you to access the cash in your own life. The exceptions are where you’re diagnosed with a terminal illness or suffer from a critical illness, or where the policy is held within an ISA wrapper. Otherwise, people must begin paying income tax on their cash at 18% as soon as it’s taken from the policy, even if they don’t need it for several years.
3. It’s likely to take time to earn a return
Even if the policy performs well, you’re still not guaranteed that the income you receive can outpace the interest rate on savings accounts, leaving you out of pocket.
In conclusion, investment-linked policies are useful for providing your family with a lump sum on death and for allowing you to access your cash value to help pay for other plans. They’re a good alternative to buying very costly life insurance, but they’re unlikely to grow your pot of money and can be expensive over the longer term. The likelihood is that you’ll need a mix of financial products that work alongside each other.