Do you have a LISP? - Investing through a Linked Investment vs a Life Insurance Company.
In the financial industry and when talking about a LISP, we aren’t debating whether or not an investor has a speech impediment. Rather, we’re speaking in terms of the Linked Investment Service Providers (LISP) which is South African jargon for an investment platform that offers a 1-stop shop for investors.
In brief, when you take out an investment policy, you have the option to either invest through LISP or a life insurance company. While there are several similarities between these two investment options, such as tax, estate duty benefits, and the need for you to choose an investment portfolio, there are several differences between these two options:
1. Investment guarantees.
While guarantees are not usually provided for on LISP, investments through a life insurer often have a range of investment guarantees. These guarantees help protect your investment against poor performance if the market dives. However, the guarantees offered on life insurance investments do not come for free. By providing investment guarantees, you will lose a percentage of your investments, thereby adding to your overall costs.
2. Additional Benefits.
Like the investment guarantees, LISPs do not usually provide additional benefits. However, investments through a life insurer often provide benefits such as premium waivers on disability and retrenchment. Which are used to fund regular premium payments if you become disabled or are retrenched.
However, this benefit may not be all that it’s cracked up to be. The whole purpose of putting money towards investment is to save money for your long-term financial goals and leave this money untouched by your other financial obligations.
The additional benefits offered by life insurance investments do exactly that. They draw money away from your investment and put it towards disability or retrenchment benefits. Hence, not all of your premium goes towards your investment.
3. Broker commission.
One of the most important ways in which these two investment routes differ is how your financial advisor earns commission and what this means for you in terms of costs.
On LISPs, brokers earn a marginal percentage of your recurring premium, whereas, on the life investments, brokers earn upfront commission on premiums that you have not paid yet PLUS a recurring premium thereafter. For example, if you pay R1000.00 per month for a life investment, the broker will receive R1500.00 upfront payment at the start of the policy.
This not only means that your first premium does not go towards your investment but that you are also R500 out of pocket. In addition, you will have to pay approximately R29.00 as and when for every recurring monthly premium for the first five years, after which it will increase to about R58.00.
These amounts are only for a R1000 premium, but can you imagine the upfront commission the brokers would earn if you invested R5000.00 or more? In contrast, if you invest the same amount (R1000.00) with a LISP investment, the broker will only earn a small portion for your monthly premium (e.g., 0.86%).
This means that for every R1000.00 per month you invest, your broker would earn R8.60. Unfortunately, the upfront commission acts as a strong incentive for brokers to sell individual investments through a life insurance company and they may not have informed their clients that they have done so.
These are just a few factors that you need to be aware of before you choose an investment structure that meets your needs. As such, it is also essential that you check any existing policies and monitor the progress of your investments.
For more information about your investment options contact a PBA financial advisor.
Phone: 011 803 9686