Investment-linked Assurance Scheme (ILAS) is a long-term life insurance policy issued by an insurance company, and it offers both life insurance protection and investment options. Some people only focus on the investment returns and ignore the protection when choosing an ILAS policy. However, as life insurance is designed to cover the risk of death, consumers should also consider whether the death benefit of the ILAS product meets their needs.
There are three common types of ILAS products, namely “Pure 105”, “Capital preservation upon death” and “Protection Linked Plan (PLP)”. In terms of the level of life insurance provided, the first two come with a lower level of protection, while the third one offers higher protection. As they calculate the death benefits differently, the death benefit amount may vary significantly.
1. Pure 105 (low protection ILAS)
The death benefit of this type of ILAS product is 105% of the policy account value. As the account value is linked to the performance of the investment options (usually funds) chosen by the policyholder, the death benefit will change in line with the account value, meaning it can go up or down. Death benefit can be very low when performance of the selected funds is poor.
2. Capital preservation upon death (low protection ILAS)
The death benefit is the higher of 105% of the account value or total premium paid (less withdrawals). It is capital-protected as the minimum death benefit is equivalent to the total premium paid. However, only the death benefit is protected, but not the account value. In addition, death benefit during the early policy years is low in the case of regular premium payment ILAS since the gross premium paid is low.
3. Protection Linked Plan (high protection ILAS)
Protection Linked Plan (PLP) was introduced by the Insurance Authority in 2021. Before the insured reaches the age of 65, the death benefit of PLP is 105% of the account value or 150% of total premiums payable (less withdrawals), whichever is the higher. As PLP offers a higher level of protection, the cost of insurance will also be higher than that of Pure 105 ILAS and Capital preservation ILAS.
Illustration of PLP death benefit:
Assuming a person, at the age of 30, took out a PLP with a policy term of 10 years and an annual premium of HK$50,000. He had made regular payments and had not withdrawn any money during the period. Unfortunately, he passed away 3 years after the effective date of the policy. How much will the death benefit be?
First of all, we need to determine the 105% of his account value. Assuming that his account value is HK$100,000, the death benefit based on the account value will be HK$105,000. If the death benefit is based on the total premium payable, i.e. HK$50,000 x 10 years x 150%, the total death benefit will become HK$750,000. Since the PLP death benefit is based on the higher value, it will be HK$750,000.
Meanwhile, if the policy holder insured passed away on/or after the date he reached 65, the death benefit calculation of PLP will be similar to that of the capital preservation ILAS, which is the higher of 105% of the account value or the total premiums paid (less withdrawals).
8 April 2024
