What are unit-linked investment insurance products?
In all developed countries of the world, Unit-Linked products are one of the most popular tools in the insurance and investment services market, as they represent a successful symbiosis of these two areas.
But it cannot be attributed to any one market. Thus, in the USA, up to 60% of life insurance contracts are concluded using Unit-Linked technology. In Europe, this segment accounts for 30 to 70% of all money.
In fact, Unit-Linked is a hybrid of classic endowment life insurance with an investment component in the form of mutual funds.
That is, a part of the portfolio, at the request of the client, is placed in more risky and potentially profitable financial instruments.
Why is this combined product interesting for us?
The first advantage is the standard insurance coverage. From the very first day of investing under the Unit-Linked program, the client receives full insurance for the entire amount of coverage, that is, the initial investment and the amount of future investment. Of course, some people take insurance very lightly.
And although accidents happen with enviable regularity, for some reason many of us hope in our hearts: “Nothing like this will happen to me, because I know what is possible and what is not.”
Everyone thinks that he knows and realistically assesses his strength, and hopes, in extreme cases, for the instinct of self-preservation. Quick thinks he’ll run away. The strong believe that he will win. And the smart one… The smart one doesn’t believe – he knows: it is necessary to have insurance for all occasions.
Insurance programs just allow you to cope with the consequences of accidents and maintain a stable financial position in unforeseen circumstances. At the same time, if we survive until the end of the insurance period without any problems, then we get back the entire accumulated amount plus the interest that has run up on it.
That is, in fact, we acquire insurance coverage, and at the same time, money not only does not disappear, but also accumulates in our account.
Moreover, if suddenly, after some time, the client loses his ability to work, the insurance company continues to make contributions for him under the program, which is guaranteed to allow you to receive the entire accumulated amount by the end of the term.
However, all accumulative programs can boast of such a plus , but at the same time they have one very significant drawback – the income that we will receive from the accumulative program by the end of the term will be very low.
On average, the yield of insurance savings programs allows clients to count on only 5-6% per annum, which is significantly lower than the inflation rate and the yield on bank deposits, although it is comparable to the most conservative bond funds .
This is due to the fact that insurance reserves are placed in a very conservative way. Naturally, there is no particular desire to accumulate funds for 10-20 years with such a low rate – it’s a pity for the lost money.
This is where the key difference between Unit-Linked products comes into play. Part of the accumulated amount is invested in investment instruments that can bring the owner an income that significantly exceeds the capabilities of insurance programs. Basically, these are investment funds.
Example:
| Cumulative insurance | Unit Linked | |
|---|---|---|
| Distribution of funds | 100% in the insurance program | 20% – in the insurance part 80% – in the investment part |
| Profitability under the program | 4% | 4% – for the insurance part 15% – for the investment |
| Amount of annual investment | $1000 | $1000 |
| Guaranteed insurance coverage from day one | $20,000 | $4000 |
| Accumulated capital | $30,000 | $96,000 |
That is, on the one hand, we slightly sacrifice the amount of the guaranteed amount of insurance coverage, which, however, refers specifically to the guaranteed amount, since in parallel there are accumulations in the risky investment part. On the other hand, we get the opportunity to create more solid capital by the end of the term. Thus, Unit-Linked products allow you to provide quality life protection along with efficient capital accumulation.
In developed countries, they have long come up with and developed the technology of Unit-Linked products, according to which the insurance company, at the request of the client, allocates part of his savings to mutual funds of bonds, stocks or mixed investments. As a result, today the development of this wonderful product in its full form is hindered by a number of unpleasant factors.
First, according to the “Rules for the placement of insurance reserves by insurers” approved by the Ministry of Finance, the total share of assets placed in shares of mutual investment funds should not exceed 10% of the value of reserves for life insurance.
Secondly, according to the law, the sum insured must be determined at the time of the conclusion of the contract, which is impossible for Unit-Linked, since the investment income is not predetermined and is not guaranteed in any way.
And thirdly, the rules for working on this product are not defined. All over the world, insurers maintain personalized Unit-Linked customer accounts. The companies employ actuaries who are responsible for the correct accrual of investment income on these accounts. And in the reporting of insurers transactions on such accounts are accurately reflected.
Does this mean that we won’t see Unit-Linked products for a very long time? Not at all, moreover, some management companies have already launched something similar. In fact, pseudo Unit-Linked is already present on our market – the client concludes two contracts simultaneously for insurance and investment programs. And then it invests part of the funds independently in each of these areas.
Author: Oleg Parashchak
