In simpleterms, a unit-linked is a life insurance contract that is linked to one or moreinvestment funds (not technically, but in the sense of an autonomous group ofassets). Unlike a conventional pure risk insurance policy, it may provideinvestors with both insurance and investment under a single integratedcontract. As a life insurance contract, it covers the risk of death or survivalof a given insured person; as a contract that is linked to an investment fund,it offers the advantages of an investment vehicle. The nature of the contract,however, is that of an insurance policy.
Albeitlinked to investment funds, the contract (insurance policy) is underwritten byan insurance company authorized for this type of product. The investor is thepolicyholder, who can either be the insured person himself/herself or appoint adifferent insured person whose life is covered by the policy. It is also thepolicyholder who appoints the beneficiaries of the insurance, whether in case ofsurvival whether in case of death, depending on the policyholder’s purposes. Inaddition to the insurance company, this type of product typically involvesseveral other parties subject to professional and compliance rules, like theasset manager, the custodian bank and the insurance intermediary feature thatprovides confidence and legal certainty to the unit-linked policy vis-à-visother investment products. How does it work? Whilst part of the premium paid bythe policyholder may be used to provide life insurance coverage, the whole orthe remaining part is invested in one or several investment funds, at thepolicyholder’s choice, taking into consideration his/her investment objectives,risk tolerance and investment horizon. Premium can be single, regular orflexible depending on the product in question. The type of fund that is linkedto the insurance policy will depend on the products offered by each insuranceundertaking. Some specialized insurance companies offer tailor made productsbuilt according to the investor’s needs.
It’s up tothe policyholder to choose the investment fund (or funds) linked to theinsurance policy, based on his/her risk tolerance and preferences. The fund’sportfolio may include different types of assets, such as shares, fixed-interestsecurities, money market instruments, property, derivative instruments, etc.The policyholder typically has a choice of funds having differentcharacteristics to which premiums can be allocated. The information on thefunds’ portfolio and investment rules is mandatorily provided to thepolicyholder previously to the policy subscription.
The premiuminvested by the policyholder, after deducted any applicable fees or charges, isconverted into a given number of fund units, each of which has a net assetvalue that is stated on a regular basis, depending on the chosen investmentfunds. In simple terms, the cash value of the policy corresponds, at eachmoment, to the total value of the investment fund times the proportion of thenumber of units held by the policyholder to the total number of units in theinvestment fund. This means that the value of a unit-linked policy directlydepends on the value of the investment funds to which it is linked, which inturn depends on the value of the assets kept in the fund’s portfolio.
Theportfolio allocated to the investment fund underlying the unit-linked policy does not give the policyholderany right of ownership over the portfolio. The fund remains the sole propertyof the insurance company; nonetheless, the allocation grants to thepolicyholder a contractual claim against the insurance company in accordancewith the provisions stipulated in the agreed insurance policy.
Policyholdersare usually allowed to make changes orto switch funds throughout the duration of the unit-linked policy, which confers flexibility to theinvestment, depending on the policyholder’s investment needs or objectives at each moment. Policyholders are also allowed to "transport” their policies to another EU memberState when they change of address, whichensures maintenance of the investment notwithstanding any changes in theclient’s personal or professional life.
From aclient perspective, unit-linked policiescan be designed to do almost anything a conventional risk policy can, with the advantage that they can also offermore flexibility. The major disadvantageof conventional risk policies lies inthe fact that the cash value of the policy at a particular time is not always clearto the client. The transparent nature of a unit-linked policy has a major appeal to policyholders who wish to monitorthe progress of the value of theirinvestment. Further advantage of unit-linked policies is that the policyholderhas control over the degree ofinvestment risk, by directing premiums to the investment funds most appropriatein relation to his/her risk tolerance.
Unit-linkedproducts can be structured in many different ways and have a wide range of application, like family protection, inheritance or tax planning, saving forretirement, mortgage or loan repayment, employee pension, executive benefits,etc. In addition, these products typically benefit from a tax deferral regime,depending on the tax regime applicable in each country.
Insuranceintermediaries have a key role inadvising the client – among a range of products available at the market on which unit-linked policy is more suitableto the client’s objectives, as they have the ability (and responsibility) toexplain the main features of the product, including commission terms andconditions, and to explain how theproduct meets the client’s needs.
Under therecent EU Insurance Distribution Directive (IDD), insurance intermediaries became subject to reinforced obligations interms of disclosure of information and professional requirements, whichnecessarily increased the level of client protection and ensured a higherquality of service to investors that search unit-linked policies, when in comparison with other types of products.
João Espanha
With 30 years of career behind him – and appointed as Tax Specialist by the Portuguese Bar Association –, hiswork consists on providing legal and tax advice to individuals and businesses,with emphasis on tax advice on life insurance. João often represents clients indisputes with the tax authorities and in judicial proceedings and he is also atax arbitrator at the CAAD, where he is frequently appointed by the taxpayer inlarge-scale complex disputes.
His large experience affords him an overall view of the problems, thus contributing to offering effective solutions to clients.João is founding Partner of Espanha e Associados Law Firm.
Leonor Futscher de Deus
Has worked at Espanha e Associados since 2005, providing ongoing assistance to nationaland foreign clients from insurance and banking sectors. She is very focused onpractical solutions and has excellent understanding of client’s needs. Her workinvolves providing legal advice on day-to-day activities (new products,commercial partnerships, drafting documentation related to products, etc.) and on more complex transactions, such as setting up foreign undertakings in Portugal (through branch offices or through freedom to provide services) orassisting on the internationalisation ofPortuguese companies. She has a wide experience in what concerns life insurance, in particular unit-linked insurances. Leonoris Senior Associate of Espanha e Associados Law Firm.
