The amendments at the level of legislative requirements were made in 2019-2020 in our country, according to which life insurance companies were granted the right to create endowment insurance products, including the ability to invest their funds in investment portfolios.
According to market participants, unit-linked (UL) is an opportunity to increase your savings by placing funds in shares of other companies without risks. It is important to understand that this is a stock-market game.
“Unit-linked is the name of investment life insurance programs that are popular abroad. This is a financial product that combines life insurance and an investment tool that allows you to get a return by investing money in various financial assets (bonds or shares). An insurance company acts as a management company, investing clients' funds in the areas they choose," says Yelena Taytugoleva, Deputy Chairman of the Board of LIC Nomad Life.
After the policy expires, the client receives the accumulated amount, which during this period can increase several times due to the growth in the cost of investments. And if an insured event occurs before the expiration of the agreement, the insurance company pays insurance benefit and the accumulated investment amount to the recipient earlier assigned by the client.
How UL works
Savings in investment life insurance are divided into two following parts:
- Insurance part: 10% of the premium sum is directed to classic endowment with a guaranteed rate in foreign currency up to 4.1%;
- Investment part: the remaining funds are placed in investment portfolios selected by the client.
“Our clients can track the value of their portfolio in their personal account, terminate the contract and transfer savings to the insurance part. They can also change the investment strategy and transfer funds to other investment portfolios depending on their “risk appetite”. For example, we are launching the investment portfolio “US Treasury Bonds” consisting of reliable assets, such as US government securities, which serves as a protective tool during periods of economic turmoil and downturns,” the interlocutor clarifies.
The money under the program is invested in foreign financial instruments, so the contract currency is US dollars. When forming investment portfolios, the insurer focuses on the historical results of stock index returns. As a result, the actual weighted average increase in value for the proposed investment strategies since launch (since October 2020) amounted to 11.17% per annum in foreign currency.
Investment life insurance policies allow their owners partial withdrawal, replenishment and early termination. “We do not recommend terminating the contract prematurely in the first two years, since the main principle of the unit-linked program is the compound interest effect, which is most effectively implemented over a long term of the contract,” explains Yelena Taytugoleva.
Tax benefits
Tax preferences apply when purchasing securities on the domestic market, but if an investor purchases them on foreign markets, the benefits cease to apply. When concluding investment life insurance contracts, policyholders enjoy tax preferences, although their money is invested in foreign markets.
Having an investment insurance policy allows policyholders to reduce their income tax and increase their return accordingly. Tax benefits on investment insurance are provided in the following form:
- Exemption from taxation of surrender values paid upon the contract termination;
- Exemption from taxation of return in amount equal to insurance premium paid under endowment insurance contract with participation in investments concluded for a period of three years or more (no more than 320 MCI per year).
“In case of insurance payout under endowment agreement with participation in investments or a surrender value (refund of insurance premium paid by the policyholder under the insurance contract), the insurance company is a tax agent for the individual policyholder, it applies the relevant requirements of tax legislation for exemption from taxation. If someone wishes to exempt your income (salary) received from your employer equal to the size of insurance premium paid under endowment contract with participation in investments concluded for a period of three years or more (no more than 320 MCI per year), such an individual must apply for this tax benefit at the employer by attaching a copy of the concluded insurance contract and a document confirming the payment of insurance premium or insurance contribution. In this case, the employer applies this type of income adjustment,” concluded the Deputy Chairperson of the Board of LIC Nomad Life.
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