[2-in-1 Protection and Investment] A comparison of protection-oriented investment-linked life insurance (PLP)

Traditional investment-linked life insurance (abbreviated as ILAS) products generally provide a lower level of coverage. In recent years, the Insurance Authority has introduced a new type of investment-linked life insurance, known as Protection Linked Plans (PLP), which significantly increases the protection element and gives consumers an additional option. There are currently three PLP products on the market, and 10Life will compare their returns, fees, death benefits and investment options one by one.

What is PLP? How does it differ from ILAS?  

In the past, investment-linked assurance schemes (ILAS) had a number of issues, including lack of transparency in charges, high early surrender charges, relatively low protection components, and the policy value could fall due to poor investment performance, ultimately causing losses to policyholders.

In view of this, following consultation with the industry at the end of 2021, the Insurance Authority introduced a new category of protection-oriented investment-linked life insurance: the aim is to increase the death benefit component, introduce a simple and transparent charging structure, and a standardised fund selection, so as to narrow the protection gap and promote inclusive finance.

The difference between PLP and traditional ILAS lies in the death benefit: traditional ILAS generally provides a death benefit of 101% or 105% of the "policy value", whereas PLP must provide at least 150% of the "total premiums paid" as the death benefit before the insured reaches the age of 65, rather than being affected by the "policy value", which is subject to fund investment performance. Some PLP products can even provide up to 750% of the "total premiums paid" as the death benefit before the insured reaches the age of 65.

As PLP has only been introduced relatively recently, there are currently only three PLP products in the market, namely the AIA友邦「兩全保」保障型投資相連壽險計劃, BOC Life中銀人壽裕悅綻保障投資相連計劃, and HSBC滙豐人壽滙萃保障相連保險計劃.

Taking into account that the three products offer different life cover options, the comparison below selects the plans with death benefit set at 150% of total premiums paid.

We begin this comparison with the products’ expected returns. PLP returns are affected by fund performance. For the sake of a simple comparison, we assume that the net return rate of the three PLPs is 3% per annum. Over time, if the policyholder decides to surrender the policy, the actual return can be reflected by the surrender value.  

In terms of policy duration, as shown in Table 1, the three PLPs have already broken even by the 10th policy year, but their early surrender values remain relatively low. As such, PLPs are more suitable for medium- to long-term investors who have a longer period to compound investment returns. Moreover, PLPs include life protection, which is more important for insured persons in their prime years, so surrendering in the early years may not be a suitable option. Comparing the three products, BOC Life offers higher returns across the short, medium and long term.

The above assumes that the annual net rate of return of the three PLPs is the same. Why, then, is there a difference in investment returns? In fact, excluding investment option factors, PLP returns are mainly affected by charges. Insurance companies are required to list out the different charges in detail. Among them, the Total Fee and Charges Disclosure (TFCD) percentage reflects the proportion of cumulative charges to total premiums, while insurance charges generally increase as the insured grows older. 

The TFCD of the three products differs across various policy terms, thereby affecting the expected returns. BOC Life has lower charges in the 10th and 20th policy years, while AIA has a relatively higher percentage in the early years but is lower than the other companies by the 30th policy year.

Life protection is superior to traditional ILAS

PLP’s life protection is also significantly higher than that of traditional ILAS. Before the insured reaches the age of 65, the death benefit under PLP must be 150% of total premiums paid or 105% of the policy value, whichever is higher. At age 65 or thereafter, it must not be less than 100% of total premiums paid or 105% of the policy value, whichever is higher. 

The three products state that life cover accounts for 150% of total premiums paid; therefore, the death benefit before age 65 (as shown in Table 3: Year 10 and Year 20) is approximately 150% in all cases, with a more noticeable divergence thereafter (as shown in Table 3: from Year 30 onwards). BOC Life offers the higher death benefit in Year 20, while AIA becomes the highest of the three by Year 30. 

One of the selling points of investment-linked life insurance is that a single policy offers a wide range of investment choices, allowing consumers to diversify risk. As shown in Table 4, AIA offers the greatest number of policy currency options. If comparing USD policies, HSBC Life offers the widest range of fund choices, which helps build a diversified investment portfolio. BOC Life also provides four index-tracking options, which are rarely seen in the market, offering fund choices with lower management fees. In addition, all three products offer USD dividend funds, while BOC Life also provides a RMB dividend fund.

The policy value of an investment-linked policy is affected by the chosen investments. However, investments can rise or fall, and if market conditions reverse and investments perform poorly, the policy value could be wiped out entirely in extreme cases, leaving insufficient value to pay the insurance charges and any applicable platform fees. Among the three products, only HSBC Life offers a guaranteed insurability benefit (i.e. guaranteed no-lapse benefit) on or before the insured reaches the age of 65, so the policy will continue to provide life cover.

In addition, the AIA and BOC Life plans both offer a basic account and an additional premium account, allowing policyholders to increase their investment amount at a lower cost under the same policy. Charges for the additional account differ from those for the basic account. After a one-off upfront fee is charged, no surrender charge will be imposed, and a death benefit will be provided (equivalent to 105% of the value of the additional account). BOC Life’s one-off upfront fee is 2.5% of each additional investment amount, lower than AIA’s 6%.

In summary, the policy value of PLP is greatly affected by various charges. Therefore, when comparing the expected returns of different products, charges should also be taken into account for reference. Among the above three PLP products, BOC Life had lower charges in the earlier years and better returns over different policy durations; AIA offers the greatest number of policy currency options; while HSBC Life offers the largest number of selectable funds (for USD policies) and a guaranteed insurability benefit.

Before considering the purchase of a PLP, consumers should do their homework and understand in detail the product’s main risks and features, including its long-term nature, charges and how it works, so as to find the product that suits them best.

Note: The last update date of this article is 31 August 2023. 

This English version of this article has been generated by machine translation powered by AI. It is provided solely for reference purposes. In the event of any discrepancy or inconsistency between this translation and the original Chinese version, the Chinese version shall prevail.