Investment-linked Insurance Policy – AIA

Investment-linked insurance policy (ILP) was a big thing before the Global Financial crisis of 2008/09. Insurance premium paid goes toward paying for investment products such as unit trusts. The policy includes a life insurance portion and an investment portion. The idea is to see these investments grow in value so that cash surrender value can be higher and final payout on maturity can also be higher than premium payment (ie with positive annual return rates).

Back in September 2007 just before the world was to witness the worse global financial crisis, I invested in AIA’s Wealth Builder ILP. 50% of lump sum premium was invested in AIA Regional Fixed Income Fund and the other 50% was invested in AIA Emerging Markets Balanced Fund.

The unit prices of these funds when I started were:
19 Sep 2007
AIA Regional Fixed Income Fund $1.594
AIA Emerging Markets Balanced Fund $1.138

From then on these funds were hit by the crisis. 19 March 2009 was the worst date for both unit trusts.

19 March 2009
AIA Regional Fixed Income Fund $1.441
AIA Emerging Markets Balanced Fund $0.729

The total fund lost 28.5% on paper on that date. After the trough, both funds recovered somewhat.

Over the intervening period of 5 years, the Fixed Income Fund rose in value above cost whereas the Emerging Markets Balanced Fund (which has both equity and fixed income components) was below cost. The latest bid prices of both funds as of last week:

26 October 2012
AIA Regional Fixed Income Fund $1.868
AIA Emerging Markets Balanced Fund $0.910

My initial investment of $10,000 is now worth $9,275, a loss of 7.25% (inclusive of 1% of surrender charge) over the principal amount invested.

I went back to look at AIA proposal on benefits and in 5 years the projected cash value is in the range of $11,400 and $13,800. The projection was very optimistic.

Because there is an element of insurance, I am insured with death benefit of $15,000 that is higher than the lump sum premium paid. Other than this benefit, my investments in both unit trusts were subjected to the market conditions, which can go up or down. I am not sure how these investments will be like from now until 2029 (when the policy matures). I do not intend to wait until then to find out. So I cashed out/terminated the policy and intends to place my money somewhere else and not in another Investment-linked insurance policy.

If someone wanted to buy an ILP, it is recommended that he reviews the investment values regularly and be active in managing it. Treat this ILP like any other investments and not to neglect it and leave it out of sight.

Copyright © 2012, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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