Investment
Investment-linked
insurance products
Pros and cons of direct investing in 101 plans
or unit trusts
By Eddy Wong
T
here are two core components
in financial planning:
investments and insurance. In
each of these categories there are many
products to choose from, and you’ll
need to research these to find the ones
that fit your situation.
An investment-linked assurance
scheme is a hybrid of life insurance
and unit trust investment. There are
countless such products to choose
from and in fact you can replicate the
structure yourself.
[ 48 ] A Plus
+
July 2008
Investment-linked insurance
The 101 plan is the most common
investment-linked insurance product
available in Hong Kong. This scheme
is a term plan where the policyholder
can receive the value of the policy
upon its maturity, which will be the
total value of the investment plan, less
all applicable fees and charges. The
underlying investment component is
unit trusts.
Since it is packaged as an insurance
product, the beneficiary will receive a
death benefit when the policyholder
dies. As the name of the plan goes, the
benefit value is normally 101 percent of
the policy’s total value.
Some investors want additional
insurance coverage, hence their
decision to invest into the 101 plan.
But the insurance component is only
1 percent of the plan’s total value, so
the majority of the premium is for
investment rather than for protection.
The plan works like a fund
investment. You can choose to make a
A unit trust is a good investment
vehicle for building one’s assets but
investors should be aware that the costs
incurred will make a great impact on
the returns.
lump sum payment, where the initial
cost will, for example, be at least
HK$100,000. It can also be regular
payments, where monthly contributions
can be as low as HK$800. The benefit
of making regular monthly payments
is that you get to enjoy the power of
dollar cost averaging (see sidebar). By
investing in the 101 plan, the potential
gain from the underlying investment
component (unit trust) enables you to
accumulate money.
Cost of 101 plan
A unit trust is a good investment vehicle
for building one’s assets but investors
should be aware that the costs incurred
will make a great impact on the returns.
There are hidden fees and charges
(monthly policy fees, administrative
fees and monthly plan management
fees, etc.) in a 101 plan. In addition,
the lock-in period requires investors to
continue making monthly payments.
This will reduce your flexibility for
other investments and might even cause
liquidity problems when emergency
needs arise.
According to some financial
advisors, their commission or advisory
fee is correlated to the length of the
lock-in period; the longer the lock-in
period, the more the investor pays
the advisor and the product issuer. In
addition, there is a surrender cost if
you want to give up your policy before
it matures. The earlier the plan is
surrendered, the higher the cost.
Invest in unit trusts directly
Investors can start to think about
building a similar portfolio themselves
to replicate those 101 plans, but at
a much lower cost. The underlying
investment component in those plans
are unit trusts, and this product can be
purchased directly via individual fund
houses, banks and more conveniently,
via online distributors. The charges
involved will only be the upfront sales
charge, which varies from 1 percent to
5.5 percent.
In general, it is cheaper to invest
online and your funds get better returns
when the costs are lower. More choices
are available when you invest in unit
trusts outside of the 101 plan and the
fee structure is more transparent.
To replicate the protection features
of the 101 plan, investors can simply
buy a term insurance. It could be a
flexible, low-cost insurance product,
which can meet most people’s
protection needs.
Pros and cons
There are pros and cons in investing
in 101 plan or in unit trusts directly.
By investing in 101 plans, financial
advisors are on hand to help manage
your portfolio and it is especially
suitable for those who lack the
required investment knowledge. In
contrast, investing in unit trusts
directly is suitable for investors who
are investment-savvy and enjoy do-ityourself investing.
Dollar cost
averaging
Dollar cost averaging calls
for investors to invest a fixed
amount of money regularly (on
a monthly or yearly basis) in a
disciplined manner.
Since the amount is fixed,
the number of units of any given
fund available to investors can
vary. If the price of the fund
increases, investors would
subscribe to a lesser number of
units and vice versa.
There are three major
benefits of using dollar cost
averaging. First, it helps
decrease your loss if the unit
price drops below your initial
price, as the average unit cost
is lowered by using dollar cost
averaging. Second, there is no
need to do market timing. Third,
the initial cost of investing is
lower compared to lump sum
investing.
The dollar cost averaging
strategy is definitely useful for
those investors who have a long
investment time horizon (10
years or more).
In addition, online investing is
suitable for busy professionals. You
can do it whenever you are free and
there is no hassle of queuing up at
the bank or signing a huge pile of
documents. With less cost involved
and more convenience, do-it-yourself
unit trust investing will become the
norm of tomorrow.
Eddy Wong is an analyst at
Fundsupermart.com
July 2008
+
A Plus [ 49 ]