There is a way to combine the potential upside of the equity markets with the protection of life insurance, and it is called an investment-linked product, or ILP.

ILPs provide life insurance, but the policy value varies according to the value of the underlying assets, as all or part of the premiums received will be used to purchase units in a fund.

That means that the returns of the policy fluctuate with the value of the units allocated to it, with risks and yields depending on the objectives of the underlying unit trust and the timing of your cash withdrawal, not to mention any exit clauses, penalties, or fees that might be imposed.

The major difference between an ILP and a unit trust lies in the protection element available, which can offer life cover, total and permanent disability cover, and, in some cases, critical illness cover as well.

For single-premium ILPs, a lump-sum premium is used to purchase units in a fund. The emphasis is usually on medium- to long-term saving and investment, so this is very similar to a pure unit trust, though the ILP still provides for a minimal amount of life protection.

As for regular-premium ILPs, they can serve two purposes – investment and protection – combined in a single policy, something not available with unit trusts. Top-up features are usually available, which means you can vary the extent of your coverage and the premium amount. Not only that, a regular-premium ILP also allows you to invest in a fund through small, regular capital outlays instead of the usual lump-sum investment initially required for unit trusts.

ARTICLE REPRODUCED WITH THE KIND PERMISSION OF SMART INVESTOR.