In 2018, there were big changes in the insurance market. First of all, it concerns the amendments to the insurance law. Despite the fact that innovations concern general and life insurance, the most talk in the market is about online insurance and electronic policies on compulsory insurance of civil liability of motor vehicle owners. Of course, this is very important and timely especially taking into consideration that compulsory auto insurance is the most widespread type of insurance in Kazakhstan. However, the market is waiting for another very interesting innovation, which, in my opinion, has been undeservedly ignored. It is unit-linked insurance. In this article I would like to talk about why this is important for the market.
Unit-linked is endowment involving the insured in investments. This type of insurance is often confused with classic life insurance contracts. The difference is that a classic product in addition to insurance coverage guarantees a fixed rate of return on the program. Upon the policy expiration the policyholder receives the accruable + income from participation in profits, if such an option is provided for in the product.
Unit-linked operates according to a similar scheme, but the key difference is that the client can independently choose his fund investing strategy. That is, the contract guarantees the same insurance protection being more attractive as it can bring the insured more savings.
In other words, a classic universal life insurance is insurance with the ability to earn additional income. And unit-linked is an investment program with an additional life insurance feature.
This type of insurance has not been represented in Kazakhstan up-to-date. In Russia, it appeared a little more than 10 years ago, and in Europe and the USA - in the middle of the last century. Initially, the idea of the product was to create an investment instrument that would legally be in a form of an insurance policy. This will make it possible to earn more income (as, capital gains are not taxed), provide insurance protection and choose arbitrary beneficiaries who will receive capital in the event of death of the insured. The product has taken root, therefore today it accounts for about 60% of the life insurance market in Western countries.
The introduction of such a product in Kazakhstan is a complicated process involving related areas: taxation, asset management, the Civil Code and the securities. Therefore, the National Bank did the right thing.
First of all, LICs have got the opportunity to independently manage the investment portfolio with the participation of the insured in the investments. Now, investment of funds is not made by asset management companies only, as it used to be. This will make the product more attractive to customers by reducing its cost.
Secondly, the amendments to the Tax Code were made. Due to this endowment will not be double taxed.
Opportunities for customers
The introduction of unit-linked insurance will give LICs’ clients a lot of new opportunities that they previously have not had due to the restrictions in legislation. The main points to note are as follows:
- Formation of a diversified investment portfolio. Having the opportunity to choose an investment fund, LICs will be able to create a high-quality and diversified portfolio. It can include different classes of assets (stocks, bonds, options, futures, structural notes, and so on), which will make it possible not to depend on success or failure with some particular instrument.
- Long-term investments. Unit-linked is a long-term investment instrument; therefore it is only effective for a long term, 5 years at least, the more the better. You will make most of the contract under such terms only.
As a result, the life insurance market will get an impetus to development as now a new and attractive product will appear at the disposal of LICs. The stock market also wins as it gets additional players and flow of funds. And, most importantly, LICs’ customers will benefit: they will have an additional financial instrument, thanks to which they will be able not only to protect themselves, but also invest savings on a long-term basis.
As for our company, we see great prospects in unit-linked, as, in universal life insurance in whole. Last few years have shown that despite a rather weak financial literacy and insurance culture among the population the Kazakhstan market is gradually growing. I am positive that thanks to a successful experience of Freedom Finance in the field of investment, we can prove that the time has come when we can sell such complex financial products as is life insurance.
Photos from open sources
Photo of Azamat Yerdessov was provided by the press service of the company.