The unit-linked policies combine the features of an insurance and investment product. “LICs will now be able to offer the client to choice among several investment strategies, including significant shares in stocks, including foreign companies. The strategies can be tied to the indices of leading exchanges. For example, Dow Jones, Nasdaq, DAX and others,” explains Yerlan Burabayev, Managing Director of Financial Institutions’ Association of Kazakhstan.
As the domestic legislation regulating the activities of the LICs focuses on money security rather than return, the assets of insurance companies and investors will be divided. “The clients’ investment accounts will be kept separately which will significantly expand investment opportunities. The insurers will create funds and form pools of clients who have chosen a specific investment strategy,” the source explains.
The insurer can play the role of a management company or transfer it to a third-party broker. “The custodian banks’ work is of great importance. According to the legislation, they are to keep track of implementation of investment strategies of LIC clients, that is, in addition to the Agency for Regulation and Development of the Financial Market of the Republic of Kazakhstan, the banks will control the insurers’ operations accuracy,” Yerlan Burabayev emphasizes.
The life of people who choose unit-linked will be insured, which means that their income will not be taxed.
What is the difference between unit-linked and classic endowment?
Endowment insurance is a direct liability of the insurer.
“There is a product with a fixed income, where, in accordance with the agreement, the LIC pays the entire accumulated amount plus investment income. The level of investment income is negotiated immediately upon the contract conclusion,” says Mr. Burabayev. If an insured event occurs before the end of the contract, the LIC will pay the entire amount specified in it.
Another classic product of the domestic market is “Insurance with participation in the profit of LIC”, the final profitability of which depends on the results of the insurer’s performance.
“Both of these products cannot bring high return, as LICs are obliged (according to legislation and requirements) to invest in financial instruments with high quality (rating) and liquidity. These tools are certainly reliable, but do not bring high profits,” said the Managing Director of FIAK.
Facts on Unit-linked
In developed countries, unit-linked financial products are traditionally popular with individuals. Up to 60% of life insurance contracts in the United States and about half in Europe account for investment insurance.
Among the countries of the former Soviet Union, unit-linked is in great demand in the Baltic States. For example, as of end of 2019, the share of this instrument exceeded 50% of the total life insurance market in Lithuania. US investment insurance, by the way, is used as an alternative to retirement savings.
Photos are from open sources.