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Unit-linked product features

Unit-linked investment life insurance is a special investment vehicle that combines two types of financial services, investment and life insurance. We explain in this material why this service accounts for 40 to 80% of the insurance market in various countries.
Unit-linked product features

In the 60s, due to high inflation and slowdown in economic growth, the UK government had to carry out unpopular social reforms (erosions of social benefits in the event of loss of breadwinner, reduced assistance to multi-member families, and retirement age increase). The concept of replacing the “culture of dependence” with “culture of entrepreneurship” was discussed in the country; it encouraged personal initiative and responsibility. At this particular time, for the first time in the world English life insurers offered the unit-linked product, an investment agreement in the form of insurance policy. The financial experts introduced a number of customer benefits, such as capital legal defense. The insurance policy is not a subject to recovery (at that moment there were many personal bankruptcies in the country). The product gave the right to receive tax benefits, as in the process of investing money was not taxed.

“Thus, life insurance is becoming one of the types of social security focused primarily on the economically active population group. The state gives up part of taxes on additional income of people, but at the same time significantly reduces the social support,” says Yelena Taytugoleva, the Managing Director of JSC LIC Nomad Life.

It is customary all over the world to distinguish several main groups among those in need of social protection, they are as follows: people with disabilities or people with an occupational disease, children from large and single-parent families, orphans, and citizens over working age. Investment life insurance unit-linked was proposed for the working-age population as it was designed to motivate people to make savings and get social security.

“Such insurance service as endowment life insurance, is able to minimize the consequences of social risks, provide security guarantee, improve the quality of human life, provide additional financial assistance in the event of an insured event and, most importantly, motivate people to plan their future and social security,” says the interlocutor. Thus, at the end, it is a rather interesting product that has been developing and enjoying wide popularity for many decades.

The country's economy is very dependent on long-term investments, their affordability. Only pension funds, life insurance companies and the budget can act as a source of long-term money in the economy. Such financial institutions as banks cannot afford to be long-term investors, since deposits are naturally short-term; therefore their main activity is reduced to short-term lending to the economy. General insurance companies also invest for short-term periods, given that their contracts are renewed annually, so for them the main investment horizon should not exceed 12 months. “Life insurance companies have long ago become the main investors in the stock market abroad. They have the means necessary to invest in and stimulate economies. The state support in our country is still more directed at enterprises, but if unit-linked and endowment insurance are popular in Kazakhstan, then the government will significantly reduce its costs to support the real sector of the economy. I would like to repeat the questions of the previous speaker: what is cheaper a tax concession or annual injections of billions of tenge into the economy?" - says the managing director of JSC LIC Nomad Life.

Institutional investors increase the efficiency of economic system, ensure the equalization of supply and demand in investment markets, influence the stabilization of the stock market, and contribute to the efficient distribution of society's monetary resources. “You see, the activities of life insurance companies and the number of clients in them have a high social significance, as thanks to LICs the savings of small investors, the most important national source of financing for investment activities, are involved in the economy,” emphasizes Yelena Taytugoleva.

How safe is unit-linked?

So far only one life insurance company in our country has offered unit-linked to the market. For implementation of this product Nomad Life received a license from the National Bank of the Republic of Kazakhstan allowing operation in the securities market.

“In a few words, the investment scheme is as follows: you conclude an agreement, and the insurance company places your funds in investment portfolios chosen by you. After the expiration of the policy, you receive the accumulated amount, which during the investment period can increase several times due to the growth in the cost of securities. And upon the occurrence of an insured event, the beneficiary receives the insurance benefit in the amount of insurance coverage and investment sum,” shares the details of the product Yelena Taytugoleva.

The client's funds are invested in two types of instruments: 10% - in universal life insurance with a guaranteed rate in foreign currency, and the remaining funds - in the investment portfolios chosen by the client. Nomad Life offers clients to choose one of the following portfolios: “500 largest US companies”, “US blue chips”, “China stock market”, “High technologies”, “Healthcare”, “Energy”, “Gold mining”.

When forming investment portfolios, we focused primarily on the historical results of the return on stock indices, and also chose financial instruments from the largest foreign asset management companies: seven investment strategies, diversified both in terms of territory and industry, which was very important to minimize risks. “We have chosen a passive index investing approach, this is the most reliable way of investing, and the portfolio structure is clear to clients. There are people who can and want to invest, they have some preferences: some of them know about the medical industry, others are in technology,” says the Nomad Life managing director.

By concluding the agreement with insurance company an investor actually opens an investment account and transfers his funds to it, which are distributed to the stock market instruments chosen by him. In case of the insurance company’s bankruptcy or liquidation 100% of the assets held in an investment account in unit-linked will remain with the client. The safety of clients’ funds is ensured by a legislatively enshrined mechanism of separating, keeping and recognizing of assets of the insurance company and client. The money of people and insurance company never mix in segregated portfolios. “People do not need to buy their chosen portfolios on their own. When opening the policy, a person indicates preferences, after which the company automatically invests the funds received in accordance with the chosen investment strategy. The client independently determines the structure of his investment portfolio and may change it during the agreement term," concludes Yelena Taytugoleva.

In the 60s, due to high inflation and slowdown in economic growth, the UK government had to carry out unpopular social reforms (erosions of social benefits in the event of loss of breadwinner, reduced assistance to multi-member families, and retirement age increase). The concept of replacing the “culture of dependence” with “culture of entrepreneurship” was discussed in the country; it encouraged personal initiative and responsibility. At this particular time, for the first time in the world English life insurers offered the unit-linked product, an investment agreement in the form of insurance policy. The financial experts introduced a number of customer benefits, such as capital legal defense. The insurance policy is not a subject to recovery (at that moment there were many personal bankruptcies in the country). The product gave the right to receive tax benefits, as in the process of investing money was not taxed.

“Thus, life insurance is becoming one of the types of social security focused primarily on the economically active population group. The state gives up part of taxes on additional income of people, but at the same time significantly reduces the social support,” says Yelena Taytugoleva, the Managing Director of JSC LIC Nomad Life.

It is customary all over the world to distinguish several main groups among those in need of social protection, they are as follows: people with disabilities or people with an occupational disease, children from large and single-parent families, orphans, and citizens over working age. Investment life insurance unit-linked was proposed for the working-age population as it was designed to motivate people to make savings and get social security.

“Such insurance service as endowment life insurance, is able to minimize the consequences of social risks, provide security guarantee, improve the quality of human life, provide additional financial assistance in the event of an insured event and, most importantly, motivate people to plan their future and social security,” says the interlocutor. Thus, at the end, it is a rather interesting product that has been developing and enjoying wide popularity for many decades.

The country's economy is very dependent on long-term investments, their affordability. Only pension funds, life insurance companies and the budget can act as a source of long-term money in the economy. Such financial institutions as banks cannot afford to be long-term investors, since deposits are naturally short-term; therefore their main activity is reduced to short-term lending to the economy. General insurance companies also invest for short-term periods, given that their contracts are renewed annually, so for them the main investment horizon should not exceed 12 months. “Life insurance companies have long ago become the main investors in the stock market abroad. They have the means necessary to invest in and stimulate economies. The state support in our country is still more directed at enterprises, but if unit-linked and endowment insurance are popular in Kazakhstan, then the government will significantly reduce its costs to support the real sector of the economy. I would like to repeat the questions of the previous speaker: what is cheaper a tax concession or annual injections of billions of tenge into the economy?" - says the managing director of JSC LIC Nomad Life.

Institutional investors increase the efficiency of economic system, ensure the equalization of supply and demand in investment markets, influence the stabilization of the stock market, and contribute to the efficient distribution of society's monetary resources. “You see, the activities of life insurance companies and the number of clients in them have a high social significance, as thanks to LICs the savings of small investors, the most important national source of financing for investment activities, are involved in the economy,” emphasizes Yelena Taytugoleva.

How safe is unit-linked?

So far only one life insurance company in our country has offered unit-linked to the market. For implementation of this product Nomad Life received a license from the National Bank of the Republic of Kazakhstan allowing operation in the securities market.

“In a few words, the investment scheme is as follows: you conclude an agreement, and the insurance company places your funds in investment portfolios chosen by you. After the expiration of the policy, you receive the accumulated amount, which during the investment period can increase several times due to the growth in the cost of securities. And upon the occurrence of an insured event, the beneficiary receives the insurance benefit in the amount of insurance coverage and investment sum,” shares the details of the product Yelena Taytugoleva.

The client's funds are invested in two types of instruments: 10% - in universal life insurance with a guaranteed rate in foreign currency, and the remaining funds - in the investment portfolios chosen by the client. Nomad Life offers clients to choose one of the following portfolios: “500 largest US companies”, “US blue chips”, “China stock market”, “High technologies”, “Healthcare”, “Energy”, “Gold mining”.

When forming investment portfolios, we focused primarily on the historical results of the return on stock indices, and also chose financial instruments from the largest foreign asset management companies: seven investment strategies, diversified both in terms of territory and industry, which was very important to minimize risks. “We have chosen a passive index investing approach, this is the most reliable way of investing, and the portfolio structure is clear to clients. There are people who can and want to invest, they have some preferences: some of them know about the medical industry, others are in technology,” says the Nomad Life managing director.

By concluding the agreement with insurance company an investor actually opens an investment account and transfers his funds to it, which are distributed to the stock market instruments chosen by him. In case of the insurance company’s bankruptcy or liquidation 100% of the assets held in an investment account in unit-linked will remain with the client. The safety of clients’ funds is ensured by a legislatively enshrined mechanism of separating, keeping and recognizing of assets of the insurance company and client. The money of people and insurance company never mix in segregated portfolios. “People do not need to buy their chosen portfolios on their own. When opening the policy, a person indicates preferences, after which the company automatically invests the funds received in accordance with the chosen investment strategy. The client independently determines the structure of his investment portfolio and may change it during the agreement term," concludes Yelena Taytugoleva.

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