Investment Life Insurance: Pros and Cons

Investment Life Insurance: Pros and Cons

According to the results of the first half of 2016, life insurance fees showed a significant increase. The main driver of growth was the bank insurance sector, but unlike in previous years, not at the expense of insurance imputed for obtaining a loan, but at the expense of investment life insurance (ILI). Many banks offer such an insurance product as an alternative to deposits, since in a positive scenario it can provide a significantly higher income. The product is difficult to understand, because to understand it, you need to not only know the basics of insurance, but also have an understanding of the investment sector. Let’s try to figure out what investment life insurance is and what you should pay attention to when purchasing this service.

What is a BCI?

Investment life insurance is a product that combines customer life insurance and a financial instrument that allows you to earn income by investing part of the deposited funds in various financial assets offered by the insurer (bonds or shares of various companies representing various sectors of the economy, precious metals, etc.). P.).

The main insurance risks under a life insurance contract are:

– survival until the expiration of the insurance contract,

– death for any reason.

The sum insured for the risks of survival and death for any reason is 100% of the premium paid, increased by the amount of investment income. Insurance periods can be from three years. Payment of the insurance premium can be made either at a time, or during the insurance period in equal installments (monthly, annually). In addition, other insurance risks (death as a result of an accident, death as a result of an accident, etc.) may be included in the policy, insurance amounts for which are set separately and, as a rule, exceed the basic insurance amount.

The insurance premium received from the client is divided into the guaranteed part and the investment. The insurance company invests the guaranteed part in conservative financial instruments with fixed income. The income received helps to ensure a guaranteed payment amount. The investment part is invested in high-yield, but at the same time high-risk financial instruments, due to which a substantial investment income is expected.

IIS is not a means of obtaining guaranteed profit. If the chosen investment strategy “has not worked”, the client, upon expiration of the insurance period, receives only the amount of the so-called guaranteed income, which, as a rule, is not more than 100% of the insurance payments made. The classic insurance risk component cannot also be called tangible, since upon the occurrence of an insured event for standard risks (for example: “death for any reason”), the insurance premium paid is paid with investment income calculated on the date the insurance event occurs. Only if there are additional risks (for example: “death due to an accident”) can an additional amount be received, usually also not exceeding 100% of the contribution.

Advantages and disadvantages

The positive qualities of investment life insurance include the presence of tax benefits: receiving a tax deduction of 13% of the paid insurance premium and the absence of tax liability for insurance payments. The maximum amount of the insurance contribution from which a tax deduction can be obtained is limited and amounts to 120 thousand rubles, and this applies only to contracts with a term of five years or more, but upon receipt of income exceeding the refinancing rate, the excess amount is subject to income tax. Thus, a maximum of 15 600 rubles can be reimbursed.

Compared to bank deposits, IJS has positive legal features. From the moment the insurance premium is paid until the insurance payment is received or the premium is returned upon termination of the contract, the funds belong to the insurer and are not the property of the debtor held by third parties. Funds cannot be confiscated, they cannot be seized, they cannot be collected in court, they cannot be divided between spouses during a divorce, and they do not need to be declared.

The contract can be concluded in favor of any person (beneficiary), and in the case of the death risk, it will be this person, and not the heirs, who will receive the payment. However, there is no need to wait for entry into inheritance rights.

The presence of a guaranteed payment amount in the contract is also an additional advantage, important when investing in risky instruments.

One of the main disadvantages of investment life insurance is the lack of the possibility of early termination of the contract with the receipt of all paid insurance premiums. Since the minimum term of such contracts is three years, and in most cases they are concluded for five years, this can be a significant problem. But in any case, not as acute as in accumulative insurance contracts. Upon termination of the insurance contract, the client can only receive the redemption amount. As a rule, when paying the insurance premium, the lump sum is 75-90% of the premium. But depending on the terms of the contract, the insurance period, the procedure for paying insurance premiums and the date of termination of the contract, the amount of the redemption amount may be significantly lower or equal to zero.

Investment life insurance is an insurance contract that has a certain list of exceptions, according to which not every case of death is recognized as insurance. At a minimum, these are standard exceptions to the Civil Code of the Russian Federation (cases that occurred as a result of intentional actions of the insured, military operations, civil unrest, as well as exposure to radiation), but the list of exceptions can be very significantly expanded by the contract.

It is necessary to familiarize yourself with the insurance rules regarding payments for events falling within this list of exceptions. As a rule, the redemption amount is paid to the heirs of the insured, but there are products that provide other conditions.

A significant drawback is the lack of a guarantee fund, which could provide payment to the client in cases of revocation of the license or bankruptcy of the insurance company. If during the revocation of the license the insurer did not transfer the portfolio or did not terminate the contracts with the return of the premium (as the law implies), you can receive reimbursement only by being included in the register of creditors.

Of course, the most obvious disadvantage of this product is the lack of guaranteed income. In case of negative development of the strategy, at the end of the term of the contract, the client will receive only the payment guaranteed by this contract.

What to look for

If you are talking about the allocation of funds with a bank representative, first of all you need to understand what product they are offering you: recently there have been frequent reviews of customers who were offered a mortgage agreement as a full analogue of a deposit, but with a higher profitability. If you understand the difference and are potentially ready to consider such a method of investing, then, in addition to studying the size of the redemption amounts and the list of exceptions, an important point is the choice of strategy and the possibility of changing it during the term of the contract. It is the chosen strategy in the future that should provide income.

The strategies proposed by the insurer are often opaque. The policyholder cannot independently track the dynamics of a particular fund in the market: as a result, he can only trust the indicators that the insurer discloses. There are objective reasons for this position: competitors can copy a successful strategy. The policyholder, in fact, has two options. The first is to try to find products with strategies that are tied to the value of certain goods (gold, oil of a certain brand) or to funds whose dynamics can be tracked in publicly available sources. The second option is to trust the professionals in the staff of the insurer who are working on strategies and treat this choice as one of the risks of investing.

One of the key indicators when choosing a strategy is the so-called participation rate. The coefficient shows what share in the growth of the chosen investment strategy the insured can apply for. The coefficient can vary greatly. With a coefficient equal to 100%, the insured’s yield is equal to the yield shown by the selected fund. An important difference between the products of different companies – the percentage of profitability multiplied by the participation coefficient can be applied both to the entire contribution amount and to the part aimed at investing. In the first case, the breakdown of the contribution into the guaranteed and risk components for the insured is simply informative, and in the second – determining for calculating the yield on the contract.

Insurance companies also offer their clients the option of changing the strategy during the term of the contract or fixing the earned income. As a rule, the number of these operations is limited (for example, once a year). Changing the strategy allows you to change the investment fund, if the chosen strategy does not bring the expected result, and the other has better dynamics. When changing the strategy, the participation rate is set on the date of change. It is advisable to apply the fixation of investment income when the current investment income of the selected fund is high enough and you predict a decrease in the level of profitability.

It is better to give preference to insurance programs of those insurers who have the opportunity to create a personal account on the site. Firstly, it will allow you to control the dynamics of the fund and respond to changes in a timely manner. Secondly, it will provide the opportunity to amend the contract (increase in amount, change of strategy) without contacting the insurer’s office. This became possible due to the adoption in June 2016 of a law providing for the possibility of filling out a life insurance contract in electronic form. When choosing a method of investing, the main thing to understand is that ILI is not an analogue of the contribution. This is an independent financial instrument with its positive and negative sides. The main thing is to observe the basic rule – do not invest all funds in one investment object.

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