Investment linked policies (ILPs) provides you with life insurance coverage which depends on the investment performance of the funds chosen. At older age, the cost of insurance can easily exceed the premium. If this happens, the insurer will sell the investment to pay for the cost of insurance. Such regular withdrawal of the investment will deplete the cash value. The depletion is further accelerated by the volatility of the portfolio. A highly volatile portfolio decreases in value faster if a regular withdrawal is made. It is possible to have no cash value at a certain point in life and if that happens, the policy will lapse due to insufficient premium to pay for cost of insurance.
As insurance is meant to transfer risk to the insurer, it does not makes sense to have an investment risk in the insurance policy itself.
A traditional whole life policy works the same way as the ILP except that the underlying investment’s performance is fully born by the insurer itself. If the underlying investment underperforms, the insurer will have the obligation to keep the policy in force as long as premium continues to be paid. For limited premium whole life policy, after the premium term is over, the policy continues to be in-force regardless of market condition.
For ILP, the underlying investment risk is fully born by the policyholder. For whole life, the underlying investment risk is fully born by the insurer. ILP is highly NOT recommended.
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