27 August 2025

Have you ever wondered if your life insurance or family Takaful plan could do more than just provide protection? What if it could also help you grow your wealth and achieve your long-term financial goals?

That is the concept behind investment-linked insurance / Takaful plans (ILP) — hybrid financial products that combine life or family coverage with investment opportunities. Whether you prefer conventional or Shariah-compliant options, these plans offer flexibility and the opportunity to build wealth while staying protected.

In this guide, we will explore how ILP insurance / Takaful plans work, whether investment-linked insurance / Takaful is good or bad, and how to evaluate them based on your financial strategy and risk tolerance.

What is Investment-Linked Insurance / Takaful Plans (ILP)?

Investment-linked insurance / takaful (ILP) is a hybrid financial product integrating life protection with investment components. For many Malaysian policy owners / contract holders, ILPs represent a versatile solution that addresses both wealth accumulation and risk mitigation goals within a single policy / plan structure.

Understanding ILP Plans

An investment-linked insurance / Takaful plan functions as a dual-purpose insurance / Takaful product. A portion of the premium / contribution goes toward traditional life insurance / Takaful coverage, while the remaining funds are invested into investment-linked funds (Shariah-compliant for Takaful plans) selected by the policy owner / contract holder.

This approach offers the potential for capital appreciation, subject to market performance while ensuring financial protection in the event of death or disability.

Due to their adaptability, ILP plans have gained traction in Malaysia. These plans allow policy owners / contract holders to actively manage their protection levels and investment strategies. However, these benefits come with responsibilities, such as ongoing monitoring and an understanding of associated risks.

Difference Between Traditional Life Insurance / Family Takaful and Investment-Linked Insurance / Takaful Plans

While both traditional life insurance and Family Takaful plans offer coverage, their structures, benefits, and underlying mechanisms differ.

The table below highlights the core differences, including how ILP allocates premiums / contributions, handles investments, and offers flexibility.

Feature    Traditional Life Insurance / Family Takaful Plan    Investment-Linked Insurance / Takaful Plan
Premium / Contribution Allocation    A portion of premium/contribution is set aside for cash value (accumulation)    Divided between protection and investment
Investment Return    Depending on insurer/Takaful operator’s investment strategy and performance    Tied to investment-linked funds’ performance (Shariah-compliant for Takaful plans); where Clients can select their funds according to their risk tolerance.
Flexibility    Fixed terms    Adjustable premium / contributions, coverage, and investment funds

Key Features of an Investment-Linked Insurance / Takaful Plan

The following features make ILP unique compared to traditional plans, offering greater control and potential for wealth growth, with ILP for takaful adhering to ethical, Shariah-compliant investment standards.

Integrated Protection and Investment

ILP plans offer life insurance or family Takaful protection while offering opportunities for wealth accumulation. For instance, while your beneficiaries remain protected in the event of death, your investment portion may appreciate over time, to help fund future goals like your child’s education or future retirement.

Customisable Fund Allocation

Policy owners / contract holders can tailor their portfolios based on risk tolerance. ILP for takaful strictly invest only in Shariah-compliant funds, while Investment-Linked Insurance Policies (ILIP) may include a wider range of conventional funds.

Adaptable Premiums / Contributions

Payments can be increased or decreased based on financial capacity. This flexibility is helpful during income fluctuations, allowing for more accessible long-term planning.

Premium / Contribution Allocation — Protection and Investment

Each payment is allocated between insurance  charges and investments unit. For example, a monthly payment of RM300 may allocate RM100 to insurance  charges and RM200 to selected investment-linked funds. In IL Takaful, sum of contribution is allocated for tabarru’ and any fee related to takaful coverage, and other part for investment funds. These funds are Shariah-screened to ensure compliance with ethical investment standards.

Investment Options and Fund Choices

Insurers / Takaful Providers typically offer a selection of funds, including:
Type of funds    Feature
Bond / Sukuk Funds    Lower risk, suitable for cautious investors.
Equity Funds    Higher potential returns, more volatility.
Balanced Funds    A combination of equities and bonds / sukuk.

IL Takaful funds must comply with Shariah principles and are overseen by a Shariah advisory board of fund manager.

Flexibility in Contributions and Coverage Adjustments

ILP plans offer adaptable options such as:

Modifying contributions / premiums
Adding or removing riders such as critical illness or hospitalisation coverage
Making top-up or partial withdrawal of investments fund
Switching between funds

This flexibility ensures the plan evolves with your life stages and financial goals

Common Misconceptions About ILPs

Despite their growing popularity, ILP plans are often misunderstood. This section aims to shed light on common misconceptions that can cause hesitation or misinformed decisions when assessing these plans.

Misconception 1: These plans are just for investing

In reality, ILPs are first and foremost protection plans with an investment element. They offer flexibility in coverage and investment strategies, including Shariah-compliant options for IL Takaful plans.

Misconception 2: I won’t be able to access my money once I invest

ILPs allow partial withdrawals from the investment account to address emergencies. However, excessive withdrawals can reduce your investment value and potentially compromise your insurance / Takaful coverage.

Misconception 3: ILP Plans do not provide enough insurance / Takaful coverage

The coverage / Takaful benefit in ILP plans are adjustable and can be enhanced with riders. However, policy owners / contract holders may need to top up funds to maintain adequate coverage.

Investment-Linked Insurance / Takaful — Pros and Cons

Let us examine the pros and cons of ILP Plans to determine if it is the right fit for you.

Advantages of ILP Plans
Potential for Wealth Growth: Investments may appreciate over time.
Dual Benefit: Protection and investment in one plan
Shariah-Compliant Option: IL Takaful caters to Islamic financial values
Flexibility: Premium / Contributions amount, coverage, and fund allocation can be adjusted
Transparency: Access to fund performance and fee breakdowns.

Potential Drawbacks to Be Aware Of

Market Risk: Fund value can fluctuate.
Fees and Charges: Includes fund management and administration costs.
Complexity: Requires active monitoring and understanding of investments.
Non-Guaranteed: Investment returns are not guaranteed and will depend on the performance of the underlying fund.

Who Should Consider an Investment-Linked Policy / Takaful Plans?

ILP plans are suitable for financially literate individuals who are comfortable with investment risk and seek integrated protection and investment features. IL Takaful plans, in particular, may also appeal to individuals who prioritise Shariah-compliant financial solutions.

Suitable for Investors Seeking Protection and Growth

ILP plans are ideal for those looking to accumulate wealth while securing financial protection. They offer a unified solution that combines life coverage (or Takaful benefits) and investment potential. IL Takaful plans also appeal to those who seek investments that align with Islamic values and avoid non-permissible industries.

Risk Tolerance and Investment Knowledge Required

Investors should understand how fund performance, market cycles, and asset allocation influence returns. A moderate to high-risk tolerance is generally appropriate for IL participants. IL Takaful contract holders, however, may opt forShariah compliant or ethically screened funds depending on their financial goals and personal values.

Long-Term vs. Short-Term Considerations

These plans are better suited for long-term financial goals such as education funding, retirement savings and legacy planning as well as estate planning. Early surrender may incur charges and reduce returns, making them less suitable for short-term needs.

Important Factors to Consider Before Participate ILP Insurance / Takaful Plans

Before committing to an investment-linked insurance / Takaful plan (ILP), consider the following key areas.

Fees and Charges Involved

Before signing up for an ILP plan, evaluate these critical areas:

Administration / services charges
Insurance charges  / Tabarru (for Takaful)  (typically increase with age)
Fund management fees

These costs impact overall returns.

Fund Performance and Average Return

Past fund performance is a helpful guide, but not a guarantee. Always review fund prospectuses and consult financial advisers to make informed choices. IL Takaful funds should align with your risk profile and Shariah principles.

Flexibility and Surrender Value

Before /surrendering a policy / plan, it is vital to assess some critical factors such as:

Whether you can pause or adjust premium  / contributions
Surrender  charges
The surrender value left after deduction of applicable charges

Death or Disability Payout

The total payout includes both protection benefits and the investment value. Riders such as total permanent disability (TPD), critical illness (CI), or accidental death can be added for broader coverage.

Conclusion: Weighing the Pros and Cons of Investment-Linked Insurance / Takaful Plans

So, are investment-linked insurance / Takaful plans a good or bad idea? It depends on your financial goals, risk tolerance and personal values. If you are looking for a solution that combines protection with the potential for investment growth, ILP plans offer a versatile option. However, they require active management, come with market risk, and may not be ideal for short-term needs.

Sun Life Malaysia offers both investment-linked insurance and Shariah-compliant investment-linked Takaful plans designed to meet diverse needs. Speak with a licensed financial advisor to choose a plan that aligns with your financial objectives and circumstances.