Pros and Cons of Unit Linked Insurance Plans

In UAE the Unit Linked Plans are available in a variant called Whole of Life Insurance, provided by various Life Insurance companies Like Zurich International Life, MetLife Alico, Salama and Royal London360 and Noor Takaful.

What is Unit Linked Insurance?

A Unit Linked Insurance is basically an Insurance contract with an investment option. It offers the benefits of both an insurance plan and a regular savings plan.

How does it work?

As in any insurance plan, the Unit Linked Insurance has a defined Sum assured, with a defined term or as whole of life insurance. The Premium payment term can be specific like 10 years, 15 years, 25 Years etc, or whole of life.

When an Insured pays a premium on his Unit Linked Plan, part of the premium is used to cover the costs of insuring the client for the current period(Mortality Charges), and the balance after deducting investment charges is invested in selected mutual funds.

ULIP Premium

Every plan holder has an investment account, which holds the various units of funds invested and it grows or diminishes in value according to the performance of the funds invested.

Investment Account of ULIP“Image courtesy of FreeDigitalPhotos.net”

It works on the Sum at Risk Principle, after taking into account the value of money accumulated in the investment account of the customer. Sum at Risk is the difference between the actual sum assured and the value of funds in the investment account.

Let’s see an Example, where an individual starts a ULIP of USD 100,000 Sum Assured. His Sum at risk started at USD 100,000 but as his investment account started accumulating value, his sum at risk started coming down.

This means, the mortality charges will be charged only on the Sum at risk which is decreasing due to increase the value of his investment account. So more money is available to invest in later period of his plan, hence the growth is faster in the later years.

Sum at Risk is the difference between the actual sum assured and the value of funds in the investment account.

Advantages and Disadvantages of Unit Linked Insurance

Advantages

Disadvantages

Lower Overall Cost: Since the Unit Linked Insurance plan accumulates cash surrender value, the overall cost of the plan works out to be lower when compared to a term assurance. 

For Eg : The total premium payable by a 30 year old non-smoking male resident of UAE on a term assurance with life cover would be $ 135.87*35*12 = $57,065.00 

If he chooses a ULIP for a same cover and period, his total premium would be $350*20*12 = $84,000,
but at the end of 35 years he will have a cash surrender value of $ 279,895 @ an average growth of 8%, which he can use for his retirement if he surrenders the insurance plan.

Higher Premium: The premiums on Unit Linked Insurance are usually higher than term insurance, because it includes an investment option also.

For Eg : The Premium for a term assurance for a 30 year old, non-smoking male resident for a life cover of $1,000,000 would be $ 135.87 for 35 years. 

Whereas the premium on ULIP would be $ 350 for 20 years, covering whole of life.

 

Flexible: The ULIP plans offer great flexibility in
increasing or decreasing the cover amount and the premiums to suit the
financial circumstances of the insured, after an initial period of 4-5 years.

Subject to Market Risks: The sustainability of ULIP’s is based on performance of the funds it is invested in; hence the investment advice and strategy are very crucial.

Equally crucial is the monitoring of the performance to make necessary changes to the investment strategy according to the market volatility.

A ULIP with a weak investment strategy or ineffective management is susceptible to low or negative returns
and loss of capital.

A good financial adviser from a reputable advisory firm will be able to set up and manage a ULIP effectively.

Premium Holiday : After an initial period of 4-5
years, the insured can avail a premium holiday while being covered

High Scope of Mis-selling: Due to the overall lack of awareness or lack of involvement by the investors, ULIP’s are mis-sold largely.

Liquidity: ULIPs offer the benefit of partial or full withdrawal; to cope with unforeseen circumstances, full surrender attracts surrender charges though

 

Young and Long: ULIPs are ideal for residents who are young, i.e. less than 40 years of age and for terms longer than 20 years. 

For residents above 40 if they are looking for longer cover term for protecting their business, or for any purpose ULIP’s will be a better option. For shorter terms they would be better off buying term insurance.

 

 

To know more about investing in a Unit Linked Whole of Life Plan in Dubai-UAE, please contact me on +97155-7701792 or write to me on damodhar.mata@nexusadvice.com

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