Unit-linked insurance has been talked about more and more, with a selling point that sounds appealing: protection and the opportunity to invest in one place. But this product is far more complex than ordinary insurance. This article explains the mechanism straightforwardly — both the interesting side and the side to be careful of — before any decision.
What unit-linked insurance is
A unit-linked policy separates the premium clearly into two parts. The first pays for the life cover and the various charges; the remainder buys units in mutual funds that the insured chooses from a list the company sets. The policy value therefore rises and falls with the performance of the funds chosen, rather than being a figure fixed in the contract as in an ordinary endowment.
The significant difference from traditional insurance
Traditional insurance provides benefits according to a table set out in the policy, with the investment risk sitting with the company. A unit-linked policy transfers that risk entirely to the insured. Funds gain, the policy value grows; funds lose, the policy value falls. There is no guarantee of return of any kind. That is the sentence to have firmly in mind before considering this product.
The charges within the mechanism
The complexity of unit-linked policies lies in the layers of charges, which generally comprise:
- Insurance administration charges — deducted from the premium at a high proportion in the early years, so the amount actually invested in the first year is far less than the premium paid.
- The cost of insurance (COI) — the cost of the life cover, deducted continuously and rising with age.
- Policy administration fees and fund fees — deducted monthly or annually according to the conditions.
The items and rates differ from plan to plan, so always read that plan's fee table first [check the conditions in the policy].
Risks to know beforehand, not afterwards
Beyond a value that moves with the market, there is a structural risk many people don't anticipate: as you age, the COI deducted from the policy value rises steadily. If fund returns are not good enough, or premiums have been stopped for a long time, the value in the policy can be deducted away entirely and the policy can lapse, even after years of premiums.
Who might suit this product
In principle, unit-linked policies are designed for people who already understand mutual fund investing, can tolerate volatility, have the discipline to hold long term, and want flexibility to adjust the sum insured or take a premium holiday with the rhythm of life. Anyone wanting certainty — wanting to know that paying this gets back that — or who has never invested in anything, should study it thoroughly or start with something easier to understand. Buying because it "sounds modern" without understanding the mechanism is the main cause of disappointment with this product.
Three questions before deciding
One: can I accept the policy value falling in some years? Two: do I understand the whole fee table yet? Three: does the seller hold an investment adviser's licence and explain the risks fully? If you cannot answer all three, it is not yet the moment to decide. Our next article goes deeper into the limitations of unit-linked policies. If you would like to understand the overall picture before talking to a seller, message us on LINE any time.
This article was inspired by material from the Thai Financial Planners Association (TFPA) and has been entirely rewritten.