Investment-Linked Insurance (ILP) in Malaysia

An investment-linked policy (ILP) is one contract that bundles protection and investment. Each premium you pay is split into two parts. One part covers the cost of insurance (the protection charge), plus any rider charges and a fixed policy or service fee. The remaining part buys units in one or more investment-linked funds run by the insurer.

Insurers often illustrate this with a simple example: of an RM300 monthly premium, roughly RM100 goes to insurance charges and about RM200 buys fund units. Treat that as an illustration only. The actual split depends on your age, the sum covered, the riders you attach and the specific product.

The funds inside an ILP are the insurer's own sub-funds regulated by Bank Negara Malaysia (BNM), so they sit under insurance rules rather than the Securities Commission. They invest in equities, bonds or a mix, similar to a unit trust, but they are not SC-regulated unit trusts and should not be described that way.

The key idea to hold onto: your protection is paid for by cancelling units when needed, and the cost of that protection changes every year.

The cost of insurance (COI, sometimes called the insurance charge, mortality charge or, in takaful, tabarru') is deducted every month. It is priced on your attained age, the sum covered, your smoker status and your health. As you get older the risk of a claim rises, so the COI rises with it, and the increase gets steep in later years.

Every insurer sets its own COI table, so there is no single national schedule and no fixed ringgit figure that applies across products. What is consistent is the shape: the charge is low and cheap when you are young, then climbs, gently at first and sharply from middle age onward.

Early on, your premium easily covers the COI and still leaves money to invest. The problem appears later. When the monthly insurance and rider charges grow larger than the invested portion of your premium, the insurer makes up the shortfall by cancelling units from your fund. Your own accumulated savings then start paying for your protection.

If fund performance is weak and the COI keeps climbing, units deplete faster than they are replaced. The policy can run down and lapse, sometimes when the policyholder is in their 50s or 60s, even though every premium was paid on time. This is the single most misunderstood feature of ILPs, and the reason the annual statement and sustainability rules described below exist.

An ILP has several charges stacked on top of each other. Only the COI is widely understood; the rest quietly reduce your fund. Exact figures are set out in each product's Product Highlight Sheet (PHS), Fund or Product Summary and the policy contract, so always read those for your specific plan.

Two cautions. The 1.5% fund management charge and the 5% spread are typical market figures, not regulated or universal levels. They vary by insurer, fund and product vintage, and several newer funds are single-priced with no spread. Check the actual numbers in your PHS.

Fund switching is usually allowed between the insurer's own funds, with a limited number of free switches per year and a small fee after that. The exact number of free switches varies by insurer, so confirm it rather than assume.

Commissions and setup expenses on an ILP are heaviest in the first few years. To stop insurers taking too much of your early premiums, BNM applies a Minimum Allocation Rate (MAR): the minimum share of each premium that must go to buy units before charges are deducted, phased so more is invested as the policy matures.

For policies with a premium payment term over 20 years, the schedule is:

Shorter-term ILPs can follow a different schedule, so this table applies to the over-20-year case.

Because only 60% of your premium is invested in the first three years, the cash or surrender value in the early years is well below the total premiums you have paid. If you surrender in year one, two or three, you typically get back very little. This is by design, and it is the main reason an ILP only makes sense if you can commit for the long haul. Buying an ILP you might cancel within a few years is close to guaranteed to lose money.

After a wave of policies lapsing in old age, BNM introduced consumer-protection rules that took effect from 1 July 2019 and now sit under the 2023 Policy Document on Investment-linked Business.

For ILPs sold from that date, insurers must set a premium expected to be sustainable to the end of the contract based on your own circumstances, and must run sustainability tests. From 1 January 2020, every policyholder receives an annual statement showing how long your coverage is expected to last on the current fund value if you stopped paying premiums. Insurers must also send a pre-lapse notice for any policy at risk of lapsing within the next 12 months. Read that statement each year; it is the earliest warning that your fund is running down.

Several things speed up fund depletion, per BNM and LIAM:

• Missing premium payments.
• Taking a premium holiday. This is not free. While you pause payments, the insurance and rider charges keep being deducted by cancelling units, so the fund draws down until it may run out.
• Adding riders without increasing the premium.
• Not topping up when insurance charges rise with age.
• Making partial withdrawals from the fund.

A premium holiday and a rider added "at no extra cost" both quietly shift the bill onto your accumulated units. Treat any such offer as spending your fund, not saving it.

BNM requires every ILP sales illustration to project values at two standardised gross investment return rates: a conservative 2% and an optimistic 5%. The point is to show you a low and a high scenario side by side so you are not sold on a single rosy number.

For equity funds, for the first 20 years the higher rate is the 10-year average return of the FTSE Bursa Malaysia KLCI and the lower rate is 2%, before both revert to the standard illustration rates thereafter. The mechanics matter less than the principle: these are illustration scenarios, not forecasts, and nothing in them is guaranteed. Actual fund returns can be higher, lower or negative.

Use the illustration as a stress test. Look at the values under the 2% column, not the 5% one, because that is the conservative case. Then check two things the illustration and annual projection should show you:

• The year-by-year surrender value, so you can see how far below your premiums it sits in the early years.
• The coverage-duration projection, so you know how long the policy is expected to stay in force.

If an agent quotes only the 5% figure, or presents it as what you will "get", that is a mis-selling signal covered below. Ask to see both columns and the full table, not a single headline number.

Most Malaysian medical cover is sold as a rider attached to an ILP. That link matters, because when medical premiums are repriced upward, the extra charge is pulled from your fund and accelerates depletion.

Medical claims inflation pushed insurers to reprice medical and health cover, and in December 2024 BNM announced interim measures to soften the impact. As of 2026 the key elements are:

• Premium or contribution increases driven by medical inflation are spread over at least three years (2024 to 2026) rather than hitting in one jump.
• Annual increases are held below 10% per year for roughly 80% of affected policyholders.
• A one-year pause on increases for policyholders aged 60 and above who are on a minimum plan.
• Policyholders who surrendered or lapsed between January 2024 and February 2025 because of repricing could apply for reinstatement without underwriting, in a window that ran 15 January to 31 August 2025.

These are time-limited relief measures, not permanent rules. The longer-term structural direction BNM is pushing is co-payment, where you share part of each claim. If you hold a medical rider inside an ILP, expect the premium to keep rising over time and check that your fund can absorb it, or your protection could lapse when you most need it.

The standard alternative to an ILP is buy term and invest the difference (BTID): buy cheap term life and medical protection, then invest the money you saved separately, for example in EPF top-ups, low-cost unit trusts, PRS or index funds.

Term insurance is far cheaper than an ILP for the same sum assured, because you are paying only for protection with no investment attached. The trade-off is that a term premium is a pure expense: nothing is returned to you when the term ends. BTID also demands discipline. You have to actually invest the difference every month, and keep doing it, or you end up with neither the protection value nor the investment.

An ILP buys you convenience and one automatic bundle. BTID gives you lower cost and full control, at the price of doing the work yourself. Which wins depends on your discipline and how long you will hold, not on a slogan.

An ILP is a legitimate product for the right person. It tends to suit someone who:

• Wants bundled long-term protection with some investment and will not manage a separate portfolio on their own.
• Can commit to premiums long enough to get past the front-loaded early years, where surrender value is low.
• Understands that the COI will rise with age and is prepared to keep the fund topped up so the policy stays in force.

It tends to be a poor fit for someone who:

• Is chasing pure investment returns, where the layered fees and COI drag work against you.
• Only needs short-term protection, for example cover for the length of a loan, where term insurance is cheaper and cleaner.
• Might cancel within a few years, where the low early surrender value locks in a loss.
• Will not read the PHS or the annual statement, and so will not notice the fund running down.

Before committing, remember that the funds inside an ILP are insurer sub-funds under BNM, and that insurance and takaful benefits are protected by PIDM within limits. The convenience is real. So is the cost. Judge it against your own discipline and time horizon.

ILPs are complex, which makes them easy to mis-sell. Watch for these red flags from an agent:

• Presenting the 5% (or higher) illustrated return as guaranteed or expected.
• Describing the ILP mainly as "savings" or "investment" while downplaying that charges rise with age.
• Not walking you through the PHS, the sustainability or coverage-duration projection, or the year-by-year surrender value.
• Recommending you surrender an existing policy to buy a new one (churning), which resets the front-loaded charges.
• Pushing high sum-assured riders that raise your COI without explaining the impact on your fund.
• Not disclosing that early surrender returns far less than the premiums you have paid.

Before you sign, ask:

1. What are all the charges (COI, policy fee, fund management fee, bid-offer spread), and how do they change as I age?
2. Show me the year-by-year surrender value, and how long my coverage lasts if I stop paying.
3. What happens to my fund if insurance charges exceed my premium?
4. What are the projected values at both 2% and 5%?
5. Is this bundle cheaper or dearer than buying term protection and investing separately?
6. Can I see the Product Highlight Sheet and Fund Summary before I sign?

A good agent answers all six without hesitation. If any question is dodged, slow down.