Investment-linked annuities (ILAs) are hybrid financial products that combine features of traditional annuities with investment opportunities. They offer a way to accumulate wealth while providing a stream of income during retirement, but with an element of market risk.
How They Work: When you purchase an ILA, a portion of your premium is allocated to an investment portfolio, which you usually get to choose from a range of options offered by the insurance company. These options typically include various mutual funds, such as equity funds, bond funds, and balanced funds, each with different risk and return profiles. The remaining portion of the premium covers insurance costs and administrative fees.
The value of your ILA fluctuates based on the performance of the underlying investment portfolio. If the portfolio performs well, your annuity value grows. Conversely, if the market declines, your annuity value may decrease. This is a key difference between ILAs and fixed annuities, where the interest rate is guaranteed.
Accumulation Phase: During the accumulation phase, your investment grows tax-deferred. This means you don’t pay taxes on the earnings until you start receiving payments during the payout phase.
Payout Phase: When you’re ready to retire, you can begin receiving income payments from your ILA. There are several payout options, including:
- Lifetime Income: Provides a guaranteed income stream for the rest of your life, regardless of how long you live.
- Fixed Period: Pays out a set amount of income for a specified period.
- Lump Sum: Allows you to withdraw the entire account value at once. This option may trigger significant taxes.
Advantages of ILAs:
- Growth Potential: Offer the opportunity for higher returns compared to fixed annuities, particularly during periods of strong market performance.
- Tax-Deferred Growth: Earnings accumulate tax-deferred, potentially leading to greater wealth accumulation over time.
- Flexibility: Allow you to choose from a range of investment options to match your risk tolerance and financial goals.
- Income Stream: Provide a guaranteed income stream during retirement, helping to ensure financial security.
Disadvantages of ILAs:
- Market Risk: The value of your annuity can fluctuate based on market performance, and you could lose money.
- Fees: ILAs typically have higher fees than other investment products, including surrender charges if you withdraw funds early.
- Complexity: Understanding the features and risks of ILAs can be challenging.
- Guaranteed Minimum Death Benefit: If the annuitant passes away before the annuity has been fully paid out, a beneficiary will receive at least the initial investment. However, the death benefit might not be high if market performance has been poor.
Important Considerations: Before investing in an ILA, carefully consider your risk tolerance, financial goals, and time horizon. It is essential to understand the fees and charges associated with the annuity and to compare it to other investment options. Consult with a qualified financial advisor to determine if an ILA is the right fit for your individual needs.
960×400 investment linked lifetime annuity digital from www.actuaries.digital 
1422×740 ocbc investment linked plan ilp singapore from www.ocbc.com