Tuesday, February 21, 2012

UNIT OR INVESTMENT LINKED INSURANCE POLICIES IN KENYA – ARE THEY FOR YOU?

Recently an insurance agent tried to interest me to a unit linked policy of sorts and when I pressed for more information I got a very attractive write up on projected earnings over the years (if times are good), they even had an annual premium adjustment to take care of inflation! Not being very satisfied, I dug up some information.

There are many views on the unit linked policies, some say that it is the future of the insurance industry to the extent that some insurance companies only have such policies e.g. Pan African Life, others say insurance cover should not be linked with investments.

What has made investment linked insurance products grow very rapidly is trying to kill two birds with one stone, ie. having insurance protection and at the same time not missing an opportunity to participate in investment. However, it is vital to be aware that insurance and investment are two different things. People buying such investment linked products should have a clear understanding how the product works.

The policies also come in many forms and are usually combined with life and education policies and have fancy product names in the line of Maxisave, Flexi, IncomeBuilder etc. So why the tie-up with investment-linked?  A unit linked (or investment linked) policy is one in which the benefits are determined by reference to the value of a collection of investments which are broadly identified and to whose fortunes the return is linked. Typically, this will comprise a portfolio of equities, bonds and, sometimes, real property.

This arrangement might be thought of as similar to owning units in unit trusts or shares as direct investments, but legally the position is quite different. There is a contractual relationship between the policyholder and the insurer. The policyholder’s entitlement is governed by that contract, according to such events - death, maturity or surrender whole or partial - as the terms provide for. The sum payable may, subject to the nature of the event, depend on the value of the linked investments.
Simply put, a unit linked policy consist of 2 major elements, the insurance elements and the investment elements. Think of it as a hybrid product between a Unit Trust and Conventional Insurance policy.

Note that similar to any investment vehicles out there, the investment funds (part of your premium) is subject to growth and losses, based on the performance of the underlying investment activities of the funds. The fine print will normally contain the following “Investment-linked plans, like other types of investments, are exposed to investment risk. The unit price of an investment fund is linked to the total value of the plan, which fluctuates with the movements in the unit price. You may realise a gain or loss when you sell your units, and may even get less than what you invested. Past-performance of an investment-linked fund's track record is only a guide to future performance.”

A portion of premium payment is used to purchase units in the investment linked funds managed by the insurance company. The protection coverage is provided by paying the insurance charges, fees and other related expenses via the deduction of the premium or sale of units from the investment funds.

Unlike unit trust investments, the full amount paid may not always be allocated to purchase units. Before buying the unit linked policy, it is important to find out what percentage of your premium would be used to purchase units which in Kenya you are unlikely to be informed. Usually, from the beginning years a bigger portion of the premium paid is used to pay for the insurer’s expenses such as agent’s fees (typically 1st year-50%, 2nd year 30% etc) and administration costs. Hence smaller portion would be used to purchase investment units. These expenses decrease over time, the premium allocation increases to purchase units increases until it reaches 100% in later years. For most insurance companies, the 100% premium allocation takes place after the 6th to 7th years for a 15 year policy. This tells you that should you attempt to discontinue the policy during the first years, you will get much less than the premium you paid for over the years or nothing.

Now, do you remember why you bought a unit linked policy? 

Conclusion
So, is unit linked insurance product a good choice? Depends with your personal objectives on investment and insurance cover. However, if you can afford, and insurance protection is a significant objective, I will strongly recommend you to consider other pure insurance cover options in view of the potential risk of compromising the protection coverage due to poor fund performance. If your primary objective is for investment, then go for a 100% investment focus channel, like Unit Trust, Sacco deposits etc. Don’t let the attractiveness of having it all (investment + life protection + low premium) blind you!

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