There are many ways to save and invest in addition to traditional pension plans and mutual funds. The Unit Linked is one of them born within the insurance world. If you have a policy with a large insurer it is easy that you have been offered with PIAS.
What is a Linked Unit?
A Unit Linked is a savings and investment product structured around life insurance. In other words, it is rather a life-saving insurance in which part of the money that is contributed is destined to investment and another to the payment of the life insurance policy (in the following section we extend its operation).
Unit Linked are born as an investment formula to avoid taxing the benefits that are obtained by investing in mutual funds. Its name can be translated as “linked to business unit” and this unit would be the investment funds on which the life-saving insurance works.
How a Linked Unit Works
A Unit Linked uses life insurance as a work structure. This insurance is the one that marks the investment to be made on a regular basis and its term. In other words, the client will pay a series of monthly or annual insurance premiums, as would any other life, car, or home policy. The difference is that the insurer will not use all that money to cover the contracted risk say, death). Instead it will allocate most of the capital to a basket of mutual funds and a small part to the life policy. For that reason the indemnities in case of death with a Unit Linked will be minimal.
And what about investment money? The capital destined to investment will be taken to a basket of profiled funds. Most insurers will offer three investment options: conservative, moderate and aggressive (you may under different names). Each basket will be composed of different funds and it will be the saver’s decision on which ones to invest, being able to change the composition of the basket a limited number of times a year.
With this operation, Unit Linked derives the management of funds to the saver. To prevent this from happening, more and more units are linked that make an integral management and even limit or eliminate the possibility of choosing in which funds to invest. Thus they can resemble the profiled bottoms of funds that are so fashionable.
As an example, if the Unit Linked premium is 10,000 dollars per year, 9,900 dollars will be used to invest in funds and the remaining 100 to life insurance itself.
Advantages of Unit Linked
The main advantage of a Unit Linked is that, as with an investment fund, the payment of taxes is deferred until the final redemption of the product. In other words, it allows you to harness the power of compound interest and grow savings faster.
To this is added the tax benefit in case of choosing to recover the money in the form of annuity.
In the case of profiled wallets, it is already invested according to a certain risk profile and the decisive factor is eliminated. It is the department of an insurance company that makes the investment decisions for us. This, of course, also has a negative point, as we will see later.
Disadvantages of Unit Linked
The main disadvantage of this investment product is that the transfer of funds is now exempt from taxation. Hiring a portfolio of funds directly may make more sense than doing so through a product that is actually life insurance. And is that so no money should be allocated to the payment of life insurance (200 euros in 25 years will add about 8,600 euros at 4% constant interest).
To this is added the fact that the portfolio is profiled and does not have the care and the mime that can offer us an EAFI when dealing with our investments.
The other disadvantage of Unit Linked is shared with most investment products: money is not insured. This is not something that we should worry about if we invest in the long term, where the objective will be the profitability above conserving the invested capital. In this sense, never lose sight of the fact that, save for deposits; a guaranteed product almost always hides a trap.
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