Life insurance and unit trust: Investment linked

When we buy investment linked insurance products we are not buying insurance alone. We are buying insurance and unit trust. We are not just paying the premium for the insurance protection of loss of income; we are paying for unit trust investment too. In fact, if you look at the section of Investment Linked prices in newspaper that is usually below unit trust prices, you can actually call such products an Insurance Linked Unit Trust. :-)

In investment linked products, life insurance and unit trust are bundled into one financial package. You may argue that unit trust investment is, too, a form of insurance to protect against loss of income. This is mere twist of words. The fact is that insurance gives you protection that you have not earned, i.e. you pay RM400 now and you will get to claim RM50,000 upon incident. For unit trust investment you get what you have paid for and the return it gives, i.e. you pay RM400 now and you will get RM400 plus investment's return back.

This is the 2nd key concept you must know in managing risks through insurance. Insurance protection covers what you have not earned. Investment pay you what you have earned.

Functionally, therefore, insurance and investment are different. You don’t call investment as insurance. The word investment itself spells clearly that it will give you future income. It is not “a form of insurance” that gives you future income.

To distinctively differentiating the mechanism between the two is critical in managing risks. Insurance addresses your current needs for financial protection. It is about NOW, the imminent and pressing requirements to be protected financially NOW. While investment can only provides for your FUTURE financial needs when the investment grows big enough.