Our previous article set out what a unit-linked policy is. This one continues with its limitations in detail, because a complex product demands a correspondingly deep understanding. This is not written to say unit-linked policies are bad, but so that anyone considering one decides with information from every side.
Limitation 1: less is actually invested in the first year than you think
The administration charges deducted from the premium in the early years are usually a high proportion, meaning only part of the first premiums actually buys units. The policy value in the early years is therefore usually significantly below the cumulative premiums paid. Anyone thinking of holding it briefly and withdrawing will find this product answers almost nothing, because it is designed to be worthwhile only over a long holding period [check the conditions in the policy].
Limitation 2: the cost of insurance (COI) always rises with age
Unlike level-premium plans, a unit-linked policy deducts the cost of cover at your actual age every year. In youth it is so cheap as to be barely noticeable, but from 60 onwards it accelerates markedly. If the sum insured is set high and fund returns do not cooperate, the policy value can be eaten by COI faster than the investment grows. This is why you must look at long-term policy value projections across several scenarios, not only the attractive-return case.
Limitation 3: the policy can lapse even when you never meant to abandon it
The point that hurts people most is assuming that "you can take a premium holiday" means safety. In reality, during that holiday the charges and the COI continue to be deducted from the policy value. If the value left is not enough to cover them, the policy lapses and all cover disappears. Anyone using the premium holiday feature must therefore monitor the policy value regularly — not pause and forget.
Limitation 4: the tax treatment isn't the same as ordinary life insurance across the whole premium
A unit-linked premium separates into a protection part and an investment part. Generally only the protection portion and the main charges under the applicable criteria qualify for a tax deduction; the portion going into investment does not. The separate figures can be seen in the company's premium certificate. Anyone buying in the hope of deducting the full premium should check this first [check the latest information].
Limitation 5: it requires more understanding and monitoring than ordinary insurance
A unit-linked policy is not a buy-and-forget product. Holders should review the fund portfolio inside the policy, adjust the allocation with age and the market, and check the policy value at least once a year. For anyone with no time or no interest in investing, this product becomes a burden rather than a tool. On the seller's side, an investment adviser's licence is required to offer it — and if a seller explains only the good side without mentioning the risks, that is a clear red flag.
Questions to ask the seller before signing, every time
- Which page is the full fee table on? May I see each item?
- May I see policy value projections for low, medium and high return scenarios?
- If I stop paying premiums in year X, how many years will the value last before the policy lapses?
- Which part of the premium qualifies for a tax deduction?
- Is there a traditional plan that answers the same need? Please compare them for me.
If you receive answers to all five and it still feels right, that is a quality decision. If you would like a neutral perspective on a sales document before deciding, message us on LINE any time.
This article was inspired by material from the Thai Financial Planners Association (TFPA) and has been entirely rewritten.