Investment-Linked Assurance Scheme (ILAS) is a product combines the two concepts of insurance and investment. It was popular before the financial crisis in 2008. However, the popularity of ILAS dropped significantly after regulatory authorities implemented a number of strict regulatory measures on financial products after 2008. In 2015, the Insurance Authority also stated that all the fees of ILAS products and the commissions of intermediaries must be disclosed in the Important Facts Statement, allowing applicants understand the fees clearly. This measure greatly affected the ILAS business. However, ILAS has once again caught public’s attention in recent two years. According to the statistics from the Insurance Authority, the new premiums of ILAS in the first half of 2018 increased by 61.4% year-on-year, accounting for 10.39% of the total new premiums, up 3.69% year-on-year. We will investigate into the differences between funds and ILAS below.
Differences between funds and ILAS
In terms of characteristics, fund is an investment product and its return is generally based on the performance of the fund. On the contrary, ILAS is a combination of insurance and investment, allowing investors to enjoy insurance protection and capital growth opportunities from investment at the same time. However, it should be noted that the performance ILAS may not be determined by the performance of funds selected by the investor, it should be subjected to the terms of the policy. Moreover, investors should also be cautious that the capital they insured in the scheme may not be fully invested in funds. The insurance company will deduct the policy fees and fund’s investment fees, only the remaining net premiums will be invested in funds.
- Ownership of related assets
Investors who directly purchase funds are the fund’s unitholders, which implies that investors own the relevant assets of the fund. Conversely, ownership of funds under ILAS belongs to insurance companies, not applicants. Applicants can only ask the insurance company for compensation. The law requires that the relevant assets under ILAS should be deposited in a separate account and can only be used to pay claims against the ILAS’ policyholders or beneficiaries.
- Investment threshold
The threshold of purchasing funds directly is generally higher than that of buying funds under ILAS. The minimum investment amount for funds is generally ranges from USD 1,000 to USD 5,000, it differs from funds. On the contrary, the monthly insured amount of ILAS investors is generally between hundreds to thousands Hong Kong dollars, and this amount can be invested into several funds to diversify investment risks.
- Investment horizon
The investment horizon of purchasing funds directly is more flexible than that of ILAS. Funds generally do not have a defined investment period and there are no fixed contributions required. Conversely, ILAS is designed for investors with long-term investment goal, it generally has a required investment horizon. Early withdrawal from the plan or money withdrawal may incur a fee or a fine.
Purchasing funds only involve fund-level fees, including subscription fees, management fees, trust fees, and switching fees (if fund conversion is needed). ILAS consists of two levels of fees, which are insurance-level fees and fund-level fees. The insurance-level fee is generally 10% to 15% of the amount paid by the investor. The fund-level fees of ILAS are less than that of purchasing funds directly, subscription fee and the switching fees are not required.
In conclusion, both funds and ILAS have their own strengths and weaknesses. The investment horizon of funds is more flexible and the overall cost is lower, while ILAS has a lower investment threshold and provides investors with insurance protection. Investors should clearly understand their needs and capabilities before choosing an investment product, and should choose the products that suit themselves.