The concept of unit-linked life insurance
Unlike traditional mixed-type insurance, unit-linked insurance allows you to benefit from the returns of the investment funds you choose. This type of investment was established in the 1950s, and since then it spread and then began to develop.
Unit – linked life insurance security
As unit-linked insurance greatly influences your future options, both MABISZ (for insurance companies’ supervisor) and the MNB (the central bank is the financial institutions’ supervisor) regularly supervise insurers.
Your money placed here is protected by IPF. I stress that IPF is only right that if your money disappears as a result of a crime, it is no longer the case if you make a bad investment decision yourself.
Unit-linked life insurance meaning
Unit-linked insurance is a life insurance that is also an investment. The money invested in this form is invested in the units of the mutual funds, the return on this is for the benefit of the client.
How does unit-linked life insurance work?
The insurer deducts the life insurance (and other services) premium from the premium of the insurance contract and covers its own operating costs, the rest is invested in separately managed investment funds selected by the client (these funds have an independent investment policy).
Each asset fund consists of investment instruments (such as bonds, equities, units of other funds) in accordance with their investment policy. The mutual funds are divided into investment units, and the individual share of clients in the assets embodied in each asset fund is accounted for in investment units. Each contract benefits from the investment result through changes in the price of the units to which it belongs.
Why is unit-linked life insurance good?
Why do you need investment?
If you make a very rough financial plan about when you need to have money in your life (raising a child, retirement, own house, etc.) and redistribute them over the time remaining, you will get the amount you should set aside for these in a “piggy bank”.
This amount is usually significantly higher for most people than they could set aside on their own, so there is a need for an investment which returns can make up the missing part.
It is most convenient to start investing through a banking relationship in a securities account and through an insurance relationship through unit-linked life insurance.
How is a unit-linked account different from a securities account?
Although individual securities are also available through the securities account, expertise is required to select them (when and which to buy and which to sell). However, most people do not have this, so for them, mutual funds are also a kind of safety factor.
Of course, this is only true if you have chosen the right mode that suits you as well. We can help you with this, send a message to make an appointment.
Many people open a securities account because they want to actively engage in their investments. Of course, you can also keep a given portfolio for years through a securities account, but unit-linked life insurance makes it easier for you because of the sample portfolios and managed funds.
A unit-linked insurance is long-term, so a needs assessment is a mandatory part of it. Then at least you’re pretty much figured out why you still want to start this. This way you can choose a contract that suits your own level of risk, timeframe and other options.
Saving habit even with a small amount
A continuous fee unit-linked contract has the advantage of regularly paying in and building up your equity. Doing so also helps to form a habit, that is, not to spend all your entire fortune in the present.
With a normal securities account, there is no “warning” on the part of the financial institution, so your inpayment can easily lag behind. As long as it is not very useful to pay a low deposit per month for a securities account (as you don’t get anything for it), this amount can already be interpreted in the case of unit-linked.
Do you need unit-linked instead of a securities account?
So the answer is very simple: if you understand the money and capital market or have the background of a private banker who, after proper analysis, provides you with advice that is more beneficial than unit-linked insurance, then you don’t need it.
If you want to manage your own investment without experience, you don’t have too many chances to do it well without basic knowledge. Without financial and economic knowledge, you need an investment advisor, it just does matter which one you choose. On the one hand, this is replaced by sample portfolios and managed funds, and on the other hand, if you ask, we will help.
Unit-linked insurance reviews
In many places, you can read on the net or even hear opinions in person that for no one is offered unit-linked life insurance because you can’t get out of it well.
It is a fact that if, without expertise, you enter into the very first oncoming option and do not use it well, you are guaranteed to fail.
This can also be true if you enter into a contract by listening to someone who doesn’t understand it and promises you wildflowers or anything you want to hear, just to sign it. This can happen when someone signs up for a sales network, was a baker yesterday, and now shares financial advice. And now I apologize to the bakers (I could have brought another profession as well), but just as I with 0 days of practice can’t bake a “normal” bread, it’s true backwards as well.
Is the sales network bad?
Before you think to leave alone the sales networks then: there may be a problem with the sales person, not the network. I have already seen a contract with a financial institution that was not even after 17 years for the amount placed on it, and I have also seen one that was launched through a network as a continuous fee and was positive after 3 years.
So I am convinced that there is no way that a particular product type is bad the way it is. It may not be the most beneficial for you, or the option is right there in the product, you just need to know how to use it well. That’s why you should be more informed than aloof.
Should you terminate the contract if someone says it is wrong?
There is no clear yes or no answer to this. It depends on what they offer instead.
If it brings a little or periodically worse than you think, you don’t have to terminate it yet. Especially so that if there is nothing else instead. After all, the habit of saving here will bring you more than terminating.
A bad example of termination
I have seen that after the first 2-3 years (so the most costly stage) the agent contacted the client that this contract is not good after all, make it free of charge (termination wasn’t a good option there), and sign another one. He had about 10-15 contracts on a family level. You might have guessed: the result isn’t much, because they always only got to the point where you paid the costs (and with it the commission) over and over again.
I also met someone who said on the 10-year contract that he was in a very bad position, it has to be terminated because the repurchase value does not reach the current value. Well, that contract’s repurchase and current value will be the same at 15th year, according to the buy-back table. Anyway, in terms of yields, it was particularly good compared to the amounts paid in. If I shouldn’t heared with my own ear that the redemption value should be compared to the current one, not the one paid, then I can’t believe it. (As it is a lie.)
When there is a right of termination
In the above two cases, it is unreasonable to terminate the contract because you will not achieve greater results with it. On the other hand, I would definitely consider starting a new contract if your yields do not exceed the value of TER in any time, even by choosing another mutual fund. After all, in this case, not only do you not win with your savings habit, but you specifically lose with it. Elsewhere, however, your money could work.
Features of unit linked insurance
Both lump sum and continuous premium contracts can be launched for a lifetime as well as for a (pre-determined) term.
In this case, your insurance will expire on the date you specified. You then have the opportunity to decide how to claim your money back. You want a lump sum or an annuity. In the case of continuous premium contracts it is often found at companies (here either there are tax reasons or it is tied to a specific purpose), and pension insurance is a compulsory continuous premium unit-linked insurance.
This mode does not have a pre-set expiration date. However, this does not mean that you will never have access to your money, after all, full or partial repurchases are also possible here.
According to the insurance premium
Continuous fee contract
The insurer will then expect insurance premiums from you at pre-determined intervals and to a certain extent.
When concluding the contract, only at the start, the insurance money is expected from you.
The ad hoc invoice can be linked to either continuous or lump sum contracts. For this, you can decide when and how much to pay, as well as when to take out how much.
Unit – linked life insurance costs
The level of costs is divided depending on
- in which country you signed the contract
- it is a continuous fee or a lump sum contract
- where appropriate, the duration of the contract may be important
- In general, it is true that in the first 2-3 years of continuous fee unit-linked contracts, the highest costs are deducted in proportion.
This means two things to you:
- Don’t be scared if the value of your contract looks very ugly at the beginning. A properly chosen solution comes to balance in the long run, what you see at the beginning is a natural process.
- Only start a continuous fee unit-linked contract if you have long-term goals. This is because you can only extract the higher costs in the long run. (If you don’t have that much time, choose a lump sum contract)
Lump sum solutions typically deduct costs as a function of time, precisely to give the agent less opportunity to cheat. (A longer term means a higher commission in most places.)
The cost deduction of ad hoc fees is the most favorable, thus also trying to encourage customers to save. Unfortunately, you cannot request an ad hoc account on its own, you need to add it to a continuous fee or a lump sum master account.
Taxation of unit linked insurance
Taxation is in accordance with applicable tax laws. This law provides for the level of taxes to vary from country to country.
As an individual
The contract is typically taxed after the growth achieved. That is, you paid 100 money units, you got back 110, then 10 will be the tax base. This becomes timely when you monetize the contract. So if you keep the contract for 5 years, at the end of year 5 they will look at how much the amount paid has increased.
As a corporate
The Accounting Act provides for how taxation should be implemented. A company must value the assets it holds each year during the balance sheet period.
This is why companies (not just unit-linked types) are valued annually at companies. If they had a profit on it, it increases the result of financial operations and with it the tax base, and if they closed a bad year in the field of investment, it reduces the tax base.
Flexibility points for UL insurance
There is an eternal rule for investing. Yield, accessibility, and security form a triangle where all three cannot be yours at the same time. With unit-linked insurance, you have the option of not having to release one point entirely, but only to some extent in favor of another point.
In the event of a tragedy on the amount placed on your unit-linked insurance, the death beneficiary will receive the amount placed here and the death service shortly after notification. That is, it is not subject to the inheritance procedure and is not taxable.
Adjustability during the term
Continuous fee contracts can typically be started for up to 10-15-20 years. However, no one foresees such a time span. Accordingly, you may need to stop paying the fee, either permanently or only temporarily, and then restart it as you wish (even in the event of a permanent stop).
In the same way, you have the opportunity to determine the amount and pace of the fee payment.
Apart from pension insurance where the state prohibits the access, you can also withdraw money from unit-linked insurance before the end of the term. Of course, this has potential fees and tax implications, but your money is not concreted.
What to look for in unit-linked life insurance?
Yields of investment funds
Although the past performance of mutual funds is only indicative for the future, it certainly says a lot if they have not been able to meet the expected level of return so far.
This expected level of return does not have to be too high. In most cases, on the one hand, at least the value of the contract’s own TER, ie at least do not lose the value of your money. In addition, the current value of inflation, that is, keep the purchasing power of your money.
If neither of these can be fulfilled within a given contract, either look for another contract or look for another insurance company.
Investment goals are usually achieved in the long run. Since in the case of regular premium versions, the vast majority of costs are deducted at the beginning of the term, this is especially true for this mode. Terminating your contract prematurely may even mean you won’t get nearly as much money back as you invested.
Mutual funds themselves are made up of several assets, thus creating a diversified portfolio. If you want to further reduce your own risk, you have the option to choose from several mutual funds within a given contract.
Before making a choice, either seek expert help or read carefully the investment policy and risk level of that fund.
You can decide how much you want to actively manage your money, either at the start or meanwhile. In most cases, you have the option to decide that you do not want to be actively involved in your investment at all. Sample portfolios and managed asset funds are then available to you.
Because we are talking about long-term investments, your life situation and goals may change in the meantime. That is why insurers offer the opportunity to change the composition of your portfolio 1-2 times a year free of charge.
If you make a change, it will apply to fees you have already paid, so you will need to declare separately for any new money you send.
Unit – linked life insurance risk
You have the opportunity to build a portfolio that matches your own level of risk. The value of your investment is basically determined by the development of the price of the investment units, depending on which you may make a profit, but may even incur a loss.
Foreign currency exchange risk
Many of the investment funds are not registered in domestic currency. Due to economies of scale, these are managed through a larger fund manager, so their value is usually expressed in other currencies, even if you paid in your domestic currency.
For you, this means that you can buy fewer investment units at a higher exchange rate when you make a deposit, but you sell the same unit more expensive when you make a payment, which means you get more money back.
The role of costs in unit-linked insurance
The cost of the contract will be deducted by the insurer in any case, regardless of what result you have achieved with the contract.
This means to you that in order not to have less money in the end than you paid in, you definitely need to be able to cover the costs.
For unit-linked contracts, costs are not given on an annual basis, but on an average basis over the term. This is done because the cost deduction is not even, as it has been mentioned before.
In order for the insurer to be able to determine an average cost in advance, it is based on the contract of a sample client. This sample customer is the same everywhere so you can compare contracts. However, this customer is not you, which is why you may have differences in costs.
It can affect your own costs:
- required life insurance or other additional service
- use an ad hoc account
- selected asset funds
You can also see from this that although TER is important for comparability, it is not enough information as it is not the only feature of unit-linked life insurance.
How can you get your money?
Fixed-term UL insurances do not continue to run after their expiration, but the insurer pays the current value of the amount on the invoice.
A whole-life UL contract doesn’t mean you’ll never see that money anymore, just the heirs. 🙂 You have the option to withdraw money from the contract up to the current balance of your account. This is called a partial or full repurchase.
Then consider current exchange rates as well as any tax implications. The insurer may require you to leave a minimum amount on the account or the account will be terminated.
Upon the death of the Insured, both the whole-life and the term unit-linked contract expire. In this case, the insurer pays the current value of the invoice and also provides the amount specified in the contract as life insurance.
Be sure to review the following before signing a contract
Your own goals
It’s much easier to find a means to an end than to pay for something over a long period of time that you don’t know why.
Your financial and investment knowledge, your risk-taking skills
Although this will change in a good case, without this knowledge, you will not be able to take a solution that suits your own level of risk-taking. The needs assessment questionnaire, which is a mandatory requirement for concluding a contract, helps in this.
Your own financial means and other financial obligations
A continuous contract with a higher start-up fee can even be a VIP solution with a more favorable cost structure that can benefit you. Then you must know if it fits into the frame or is at the expense of other obligations.
The terms of the contract offered
Consider the service, the fee, the duration, the investment opportunities and the costs together. The importance of the TER value has already been discussed above, but we have seen that this is not the only consideration in the decision.
Rely on personal advice instead of calculators
Review several options in the market, either from the same insurer or another.
What is the problem with online calculators for unit-linked life insurance?
It is a natural requirement on your part if you want to choose the best unit-linked insurance for you before signing up. Many have already created many different types of calculators, some of which exist to show an image in general and some that have been developed for that particular product, or even a product variant.
In the case of general calculators, it can be said that most of them bring out either the product as the best unit-linked insurance that has the best for the developer or the lowest TER . While this may be the best for you, it is far from certain.
Product-specific calculators are already a degree better, because here they need to present the knowledge of the particular mode they are talking about as authentically as possible. Another issue is that this is not available everywhere, so your choice is not necessarily easy.
The knowledge of an average online calculator
Be aware that increasing your expected return will also increase your risk! The values calculated in the calculator are for information only, not necessarily the same as what you would receive during a personal consultation. The return on investment is affected by many things that cannot be calculated in advance.
Where can the calculator slide aside?
Creating an accurate calculator on this topic is not so easy. With compulsory motor insurance, you may already be used to having some basic data that you provide and your next annual premium can be calculated on a penny accuracy with them.
However, you typically take out unit-linked insurance for not a single year, but for decades. Thus, it is almost impossible to say that the following in just 10 years:
- which asset funds you divert your money to
- how the exchange rate of these funds will develop
- will you change your fee (either with a fee increase or a fee reduction)
- do you want to pause your investment
- will it be, and if so, when and how when you also use your ad hoc account
- whether you will buy it back in part
Since these cannot be predicted, so remain the corner numbers and the great generalities that if all goes well, this and that is to be expected.
When is unit-linked insurance not recommended at all?
By no means do I recommend any form of UL insurance if:
- You only seek reimbursable insurance in the event of an unexpected event: that is, you need risk insurance, not an investment. Then this form may be too expensive for you due to the timeframes as well as the investment part.
- Planning for the short term, with uncertain savings: if you don’t have a goal yet, or don’t know how long you can set aside that amount, even the terms of the contract will apply to you. That is, you are expected to either make a loss, or if you make a profit, you will still receive it by taking on too much burden.
- You are looking for a simple, risk-free, predictable savings opportunity: a risk-free investment may sound good, but your return is typically below the rate of inflation, and you would not necessarily be able to extract the TER of UL insurance with it. So if you are highly risk averse, this solution is not for you.
When are you doing well with unit-linked insurance?
You will do well with the optimal version of unit-linked insurance for you (eg the method of payment of premiums, the choice according to the amount) in the event that:
- Planning for the long term
- You want to make a profit on your investment and are willing to take some risk in doing so You are looking for flexible solutions to suit your life situation: whether you want a
- hange in the way you manage your investment or the pace of your payments, you have the opportunity to get it through UL insurance.
- Do you think you need a separate unit-linked account for your purposes?
- How much do you think is the monthly fee where it is already worth starting a continuous fee contract? (eg due to deduction due to administrative costs or speed of fundraising)
- How would you solve a medium-term goal with unit-linked life insurance?
If you would like to make the right decision or just be in the picture with unit-linked life insurance, contact us to arrange an appointment for this.