Should you buy Unit Linked?
Don’t buy Unit Linked until you watch this video.
Unit Linked is Life insurance that is designed to be a highly flexible long-term financial planning tool that can be adjusted to suit the timing and situations throughout life. It also has an investment component added to the policy to meet the needs of customers who want the coverage or benefits of the policy to grow according to the assets and risks they have chosen to invest in.
Policyholders can choose to focus on long-term coverage (e.g. whole life or at least 20-30 years onwards) to reduce the risk of various financial losses, whether from illness or loss of life, or choose to focus on long-term wealth accumulation (more than 10-20 years or more) to financial plan that is expected to be needed in the future, whether it is retirement planning, child education planning, or inheritance planning for our loved ones.
Buyer misunderstandings
Compared to neighboring countries in the ASEAN region, Unit Linked products are relatively new to Thailand and are still in the early stages of adoption. Therefore, promoting awareness and understanding of Unit Linked products among the public is crucial. This will help individuals comprehend that these products are designed for long-term financial planning, rather than short-term investments for immediate returns. With this understanding, purchasers can truly benefit from Unit Linked products. Additionally, this foundation will support the development of new life insurance products in the future, providing consumers with more choices.
In the past year, there have been complaints to regulators such as the Office of Insurance Commission (OIC) and the Securities and Exchange Commission (SEC) regarding Unit Linked products. However, when analyzing the cause, it becomes clear that the complaints are not because Unit Linked is a poor insurance product. The main reason for these complaints arises from the fact that consumers do not fully understand what Unit Linked is and what they should expect from this type of life insurance product.
Even today, consumer understanding remains misaligned with the true purpose of Unit Linked products. Many people mistakenly believe that purchasing Unit Linked insurance is primarily for investment or for building wealth in the future.
Investment-linked insurance (not investment insurance)
Unit Linked, also known as Investment-Linked Insurance, is a product developed from traditional life insurance. It is designed to meet the needs of customers who seek
Flexibility in allocating premiums for investment, Policyholders can choose investment options based on their needs at different life stages and their risk tolerance. Most of the premiums received (after deducting expenses) are invested in funds that offer varying levels of risk and return expectations, providing more diverse opportunities compared to other types of insurance products.
Flexibility in terms of coverage, savings, and access to funds. Policyholders can adjust their coverage amount, increase or decrease premiums, withdraw partial funds, or temporarily pause premium payments. This allows them to adapt to their individual needs during different stages of life, which may involve uncertainties or deviations from their initial financial plans. Such flexibility is difficult to achieve with other types of insurance products.
Transparency in the workings of the insurance product, especially regarding premium allocation, policy value, and benefits at different stages, enables policyholders to make informed decisions about events that may impact their financial status or coverage. This ensures they understand how the money they pay is being used and how it affects their benefits.
These three points mentioned are the key highlights of this type of policy, which traditional life insurance products (Traditional Products) cannot provide.
Unit Linked and Mutual Funds are Different
Unit Linked has a book value divided into two parts: life insurance coverage and the portion invested in mutual funds. Some consumers compare Unit Linked to mutual funds or wish to use it as an investment tool similar to mutual funds. However, the purposes of Unit Linked and mutual funds are entirely different. Unit Linked is designed to provide minimum coverage to meet the needs of consumers seeking protection and long-term financial planning, not to serve as an investment or speculative tool like mutual funds. When considering the principles, Unit Linked, and mutual funds are designed to meet the needs and financial objectives of different individuals.
Even the sellers themselves have different objectives. Unit linked focuses on protection and stability, while mutual funds focus on wealth accumulation.
The purpose of Unit Linked is not to provide insurance for wealth or richness, and its main objective is not to invest to increase money or to compete with mutual funds. The goal of stability is fundamentally different from wealth accumulation.
Why does Unit Linked have higher deductions in the first year than mutual funds?
The advantages of Unit Linked which is designed to create a high level of transparency, make it clear that the initial expenses of the policy are deducted from the premiums in the first few years quite a lot, leaving only a small amount of money to be invested back into Unit Linked, which is true.
But apart from transparency, Unit Linked products are designed to be highly flexible for those who intend to hold it long-term. In other words, Unit Linked products are designed to be held as lifelong assets, while maintaining flexibility to adjust as life progresses, something that other insurance products cannot offer.
Therefore, the initial expenses that are deducted are installation costs, system installation costs, and financial planning costs for life coverage. One of the reasons why the deduction structure in the first year is high is to prevent buyers from planning for short-term investment and to encourage buyers to plan for long-term holding.
As can be seen, if the deducted expenses are distributed on an annual basis in the long run, the expenses will be more reasonable. As for those who misunderstand and specifically buy Unit Linked for investment or short-term returns, it is not worth it. It can be said that both parties lose money, and both the insurance company and the buyer lose money.
Then combining insurance and investment.
Before the money flows into the Unit Linked investment portion, the insurance company will first calculate the premium for that year and the insurance expenses for that year. Only the remaining net amount will be allocated to the Unit Linked book value for investment.
Therefore, some people may question that, in that case, buying a term life insurance, which is a yearly life insurance, would be sufficient, and then invest the remaining amount in actual investment products. After all, it might not be much different from purchasing a Unit Linked product.
The answer is Yes, we can mix these elements and do it ourselves if we have sufficient financial knowledge and strong financial discipline. It’s like wanting a cup of coffee, you can either buy one at a coffee shop or brew it yourself. However, if you choose to brew it yourself, you’ll need knowledge about selecting coffee beans, a coffee grinder, a coffee maker, and some experience in brewing.
The benefits of Unit linked may also come from other aspects that you might not have considered such as
Providing various investment services that are beneficial to those who have no investment experience, allowing them to access the capital markets. From international experience, these funds contribute to the sustainable growth of the domestic capital market.
It offers lifelong coverage, especially when purchased alongside life planning and financial planning. After purchasing, it acts as a financial advisor for protection against financial loss, ensuring life stability and continually guiding life goals and plans. This is a life plan focused on protection and stability (not wealth accumulation).
Overcoming the economic crisis and investment volatility together because Unit Linked is designed with the intention of having someone to give advice and knowledge alongside the person who chooses to use Unit Linked. Investing in other forms of wealth and the investment portion of Unit Linked will have different purposes. And during times of economic crisis, the discipline of saving will be different.
The savings discipline mentioned above has been put into practice and has truly led to the dollar-cost averaging (DCA) method of investment. This is because most people who think they have enough knowledge and really want to invest on their own when an economic crisis occurs, will not dare to follow through with their initial investment plans. This causes discomfort, anxiety, fear, and stress, which is a matter of each person's mental state. Some people, despite having a lot of investment knowledge, do not know what to do when they encounter this issue themselves.
The fund proportion can be adjusted automatically at any time (Auto-Rebalance) by simply sharing your life goals and current life stage. Unit Linked will then automatically align itself to match your life stage.
These benefits and services depend on the consumer's choice and decision to either mix them themselves or use Unit Linked. Regardless of the choice, it is essential for everyone to have life coverage, as it is the foundation of risk management at the household level, and this is the most crucial aspect of ensuring life stability.
Unit Linked is life insurance.
The principle of all life insurance products is to serve both financial goals and life coverage. These goals may include saving for education, retirement, or providing for loved ones, ensuring that you or your beneficiaries receive the financial support needed to achieve these objectives. Life insurance becomes especially valuable if you pass away before reaching your financial goals, as it ensures your loved ones can still meet their needs without experiencing financial hardship.
Life insurance is protection from financial loss in the event of premature death. If you live a long and healthy life, it helps achieve your financial goals with stability. Unit Linked follows the same principle as traditional life insurance by providing both life coverage and financial planning to meet long-term objectives.
Paying premium less than you think
Since unit linked is a highly flexible life insurance product that benefits consumers, for example, in the case that the invested premium grows faster than the target, the policyholder can pay fewer premiums than the target and still maintain the same coverage as the target or can pay the same premiums as the target but receive higher coverage. Consumer understanding is also important because customers should understand the characteristics and features of Unit Linked insurance, including the impact of choosing those features on the policy, to ensure that the flexibility they are exchanging is risky and affects their financial plan. This can be seen in neighboring countries in the ASEAN region where regulators are trying to promote customer understanding, either directly or indirectly.
Seller misunderstandings
This misunderstanding may arise from the belief that those selling Unit Linked must hold an Investment Consultant (IC License), so when wanting to sell Unit Linked product, they will focus on selling for investment only.
Sellers should primarily focus on helping customers with life planning, financial planning, and protection planning. As for investment principles, risk tolerance of investors, and investor characteristics, Unit Linked has been designed to be suitable for the life stage of each individual.
Even though customers already have knowledge of investing, the experience of investing will be completely different from the knowledge they have. Unit Linked is designed for people who may not have much experience in investing or people who do not have time to frequently monitor their investment portfolios. However, they are suitable for people who have clear financial goals and who need protection for financial security for themselves and their loved ones.
The role of the seller is to be a consultant guiding customers in life planning that emphasizes life protection and security, not wealth accumulation. If Unit Linked is sold based on distorted principles or if the buyer focuses solely on profit without considering the life coverage aspect, complaints and dissatisfaction will likely arise. This could harm the overall life insurance industry. It is crucial for everyone to understand the principles of life insurance and household risk management, especially when dealing with investment-linked life insurance or Unit Linked.
Conclusion
Unit Linked is a type of life insurance that provides more comprehensive coverage than other insurance types for consumers seeking "life protection". If your goal is to grow a lump sum of capital and, in 5 or 10 years, you plan to use the returns for personal spending, a mutual fund might be a more suitable choice, as this is not the main purpose of Unit Linked.
However, if you aim to manage financial plans for yourselves and your family members, and if you pass away prematurely, your family will receive financial compensation for your loss. If you live a long life, the investment component has the potential to grow over the long term, absorbing market fluctuations. You can still access this fund for your own needs later, aligning with the true objectives of Unit Linked.
Especially if you’re looking for a life insurance product that provides long-term coverage, choosing Unit Linked which allows investments in long-term instruments with higher volatility can lead to lower average premiums compared to traditional life insurance. This is because traditional insurance often invests in low-risk, low-return options, which typically result in higher premiums.
Written by Master Tommy (Pichet)
FSA, FIA, FRM, FSAT, MBA, MScFE (Hons), B.Eng (Hons)
All rights reserved for the content of this article. Do not use it for any commercial gain. In addition to receiving permission from ABS company only.
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