On a high school reunion occasion, I met an old friend. Knowing I am managing financial blogs, this friend vent about his life insurance link. He complained that his investment value had slumped, while he was in great need for his son to go to college.
Plus, this friend just received a letter from the insurance company that tells him he should add funds (top-up). The insurance has a health facility that will stop if he does not deposit the top-up. "I am short of funds, eh this even asked to add funds, my groggy", he said. "In fact, I never forget to pay a basic premium", he said to close vent.
I asked for copies of the policy to be studied. After reading carefully, I asked him "do you understand the benefits and implications of this product?" He said, "Well that was the agent who explained, I have forgotten the details. What I remember, this product gives a high return ". Well you know!
My conclusion, this friend does not understand the benefits and risks of unit link products. The end, yes like this. The complaint is not necessary. The possibility of this situation can be predicted from the beginning, if he read and understand the policy well.
Before buying a product, we should understand the benefits and risks. When buying gadgets, generally we are very detailed. Research carefully for its features, comparing all offers with care. In fact, it is a gadget that the oldest 2 or 3 years, and if one chose too, the effect is small for our lives.
Especially if you buy insurance products. Insurance is used not only a year or two, but 10 to 15 years into the future, and if one chooses, the effect is great for couples and children. Items must be understood before they are purchased.
Why There Are Link Units
Definition Unit Link is a life insurance company product that marries the function of protection and investment. In the financial plan, investment and protection are two things must be owned.
- Investation. Investment is needed to achieve financial goals, such as education funds and pension funds. Without investment, financial goals are hard to achieve because relying on savings, low interest rates, will not be able to keep up with prices (inflation). Read Risk of Education Savings with small interest.
- Protection. Protection protects you from risks, for example, death, permanent disability and illness. If the primary breadwinner is sick, disabled or dies, the investment stops. Children are threatened can not go to school. The wife or husband may not be able to retire properly. Therefore, it needs protection, so that investment can continue to run even though the main breadwinner experiencing disaster.
By purchasing a unit-linked product, you get investment and protection all at once. No need to bother anymore. Everything is one package.
Unlike traditional insurance or term life insurance that only provides protection benefits. There is no investment benefit in traditional life insurance.
Link units offer many investment options with varying return potential, from low to high. There are many instruments, such as stocks, bonds, mixes and money markets. That's why unit-linked products are attractive because they offer returns well above savings or deposits. However, the prospective customer must understand that in unit link risk is borne by the policyholder, not by the insurance company, not by the agent.
In addition to attractive product features, there are conditions in Indonesian society that encourage this product to grow and develop. The fact that public insurance awareness is still weak (only 10% of people have individual insurance). I experienced how difficult it is to invite friends, blog visitors, to buy insurance. Offering insurance alone is difficult. It's a business of rejection, says a friend in insurance.
However, when offered an investment, the community is easy to receive and end buy. Probably because in the investment, the profits are clear. There is a 'tangible' benefit, in the form of money that can be taken. Meanwhile, insurance is still considered money 'charred', lost without benefits (although this way of thinking is 'totally wrong').
With these conditions, for an insurance company, it is easier to sell products that are mated with investment. Do not sell insurance products only.
That's why, education insurance rife because the community is more easily digaet with the lure of education funds, although actually behind the product of education funding is insurance. How to sell it was not infrequently reversed, offer first investment, then sell insurance ('this investment with insurance bonus').
Unit Link Work
How does unit link work? For simplicity, I use the water illustration in the bucket below. Hopefully more clarify the point.
- The premium you pay goes to the investment instrument you choose, which then generates the Policy Value. However, before that, premiums were deducted to pay a certain amount of costs, especially acquisition costs in the early years. Thus, the portion of the incoming premium as an investment is nett fee paid to the insurance company.
- The policy value, which is the result of the investment, is the money used to pay the Insurance Fee, the Additional Insurance Fee and the Administration Fee. Thus, insurance protection is paid from the investment proceeds. From here, we can see that cost cutting in unit link is done in two ways. First, direct premiums are deducted to pay for acquisition costs (only in the first 5 years). Second, the investment value is cut regularly to pay the insurance fee (for life policy).
- After paying all the fees, the rest is the value of the policy or cash value, which can be taken by the policyholder. This is a value that can be availed for education funds or pension funds.
- As long as the value of the policy is sufficient to pay the fee, insurance protection remains active. If the value of the policy is not enough, auto insurance protection stops, often referred to as a lapse policy. Before the lapse policy occurs, the insurance company will ask customers to make additional funds (top up), pay again outside the regular premium paid.
- So in the unit link, the value of the policy is an important point. Therefore, it is necessary to understand what affects the value of the policy. First, the amount of funds coming from the payment of basic and second premiums, investment return performance influenced by selected instruments (stocks, bonds, deposits etc.) as well as the ability of investment managers to manage funds. Remember: there is no guarantee of return or investment return on unit link. The risk is borne by the policyholder. If you receive an offer from an insurance agent that promises certainty of return on investment, the agent can be ascertained inconsequential.
How to detect a life insurance proposal there is a link unit or not? The easiest, check whether the insurance offers an investment. See if there is any future investment value or cash value that you can use, and its value is not guaranteed or the risk is borne by the community if it is a unit-link insurance product.
Life insurance companies in Indonesia which are famous for selling unit - link are Prudential, AXA Mandiri (joint venture Bank Mandiri and AXA), Allianz, Sequis Life and Manulife. The current trend is precisely the insurance companies are competing to offer unit links and slowly leave traditional life insurance (pure).
Benefits of Unit Link
Why Unit Link become the most phenomenal insurance product growth? Definitely because it has a better benefit than other insurance products. Ease is the most important benefit.
First, paying a premium has already gained investment and protection function. No need to take care of own investment. The insurance company will arrange everything.
This convenience helps those who do not want to complicate with the Mutual fund investment process. I talked to a lot of friends who chose link units because it made it easier for them to invest. Although there are online Mutual Fund transaction facilities from a number of banks and investment managers, Mutual Fund transaction access is still not spread, especially in cities outside Jakarta. Meanwhile, investment in insurance has many conveniences, such as payments via ATM transfers, auto-debit and credit cards.
Second, no need to bother processing, searching and managing investment. A wide selection of investment instruments, managed by a professional Investment Manager, has been provided by unit link insurance. Customers just choose according to the risk profile. Monitoring reports on monthly investment developments are sent to policyholders.
Thirdly, Unit Link offers a range of additional insurance (riders), such as health insurance, permanent disability, critical illness and others. That way, customers do not need to be bothered again, looking for own additional insurance. Everything kumplit in one package. Stay comot, want what rider.
One of them is a health insurance rider who can protect until the age of 80 years. Traditional health insurance has not been able to provide protection until this age. Maximum oldest at the age of 70 years, it also needs re-approval of the insurance (not automatically go forward). This is a distinct advantage for unit link.
Fourth, in certain cases when a small premium, eg under 500 thousand, traditional insurance is difficult to be combined with mutual funds to obtain optimal results because there is a minimum premium in traditional insurance that makes the portion of investment becomes very small so the result is less than optimal. Under these circumstances, more link units can accommodate circumstances as they receive a lower minimum premium for investment and protection.
Fifthly, the financial literacy rate of our society is still low, as indicated by a number of surveys. Therefore, to educate the public about investing in Mutual Funds is not an easy matter. I have experienced how difficult it is to explain Mutual Funds to many people, especially because many are allergic or scared, assuming financial products are complicated. In this condition, the link units present offer convenience. The investment learning function is taken over by unit link. It's good or not, I do not know, but it's a reality on the field.
Unit Link Characters
Unit Link Life Insurance is a fairly advanced insurance product. This product is complex because it combines elements of investment and protection, with fairly complex calculations.
Unfortunately, many customers do not want to read proposals and policies to understand the link unit features. Already the product is quite complicated, the customer is reluctant to read again, we can guess what will happen.