How investment life insurance works
Miscellaneous / / August 23, 2021
An original but difficult way to save free money.
What is investment life insurance
Investment life insurance, which is often shortened to ILI, is a hybrid of insurance and investment. It brings some income and at the same time promises payments for an insured event, most often death or severe disability.
Regular life insurance quite simple: a person makes a contribution, the insurance company promises to pay money if something happens to the client within the agreed period, most often one year. When nothing happens, the premium becomes the income of the insurer.
The terms of investment life insurance are arranged differently:
- The contract is concluded for a long time, usually for 3-5 years, but it also happens for 10-15 years.
- The client pays a large insurance premium, often in the amount of 30-50 thousand rubles.
- The insurance company invests the money received in financial assets - shares, bonds, index funds, options or futures.
- The money deposited is returned at the end of the contract.
In fact, ILI is a very complex constructor from different sentences. Sometimes it is compared to a bank deposit, only more profitable. In fact, they have little in common: it is closer to investment than savings.
If the insurer successfully invests the money, it will return both the premiums and part of the investment income to you. But this is not guaranteed. You may not earn anything and even lose money.
Why take out investment life insurance
ILI policies are not includedFederal Law No. 177 of December 23, 2003 "On insurance of deposits in banks of the Russian Federation" to the deposit insurance system, additional income is not guaranteed, and the contract cannot be terminated ahead of schedule without loss. This does not mean that you should not consider this tool. You just need to settle with debts, accumulate a financial cushion, create an investment portfolio - and only after that take a closer look at the merits of ILI.
Insure life
Any life insurance is an airbag for loved ones if something happens to the insured person. The ILI policy here does not differ from others: the document describes sets of risks - situations in which the company will pay money.
There are three main insurance claims.
- Death for any reason. Then the relatives will be returned the entire deposited amount and sometimes the investment income that has accumulated. But the treaty always specifies exceptions, such as suicide or death during hostilities.
- Death by accident. Sometimes such a risk is prescribed separately, and then relatives receive two payments at once: both for death and for an accident.
- Additional risks. Disability due to an accident or disability due to illness. Such conditions are discussed with each client separately and are usually asked to pay extra for them.
Invest free money
The policies are designed in such a way that they allow you to simultaneously protect yourself and give money to an investment trust management. At least, insurance companies assure this. But it is important not to forget that in any complex financial product there are many conditions that can change the whole picture.
For example, Sberbank promises to return the entire invested amount, and in addition to it - an unnamed investment income.
Although the specific conditions vary in different companies and offers. For example, capital protection at Alfa-Bank is already “conditional”. In case of unsuccessful investments, the bank will not return all insurance premiums, but, say, 90–95%.
It would seem that these are great offers - investments in the stock market, with a chance to earn as much as necessary and the risk of losing no more than 5-10% of capital. But do not forget about inflation, which can spoil the picture.
Let's say a person issued a policy for 50,000 rubles in May 2018. It so happened that the investment income was zero, so the person was returned the entire amount after three years. But now that money is worth less because of inflation.
In fact, the loss amounted to 7,209 rubles. You can consider this as a payment for life insurance and not consider the product as an alternative to deposits.
Save on taxes
Another bonus to policies is not given by insurance companies, but by the state: tax incentives and deductions.
- Not necessaryTax Code of the Russian Federation, article 213 "Peculiarities of determining the tax base under insurance contracts" pay income tax on payments for insured events. In this case, it is important for relatives. At least they don't have to worry about taxes.
- Personal income tax on investment income does not always have to be paid. Tax is chargedLetter of the Federal Tax Service No. BS-4-11 / 10652 dated June 3, 2019if the yield has overtaken the key rate of the Central Bank. Let's say our policy costs 50,000 rubles and was concluded for a period of three years, and the average key rate is 5%. You can earn: 50,000 rubles × 5% × 3 years = 7,500. If the income exceeds this amount, then you will have to pay tax on the difference. And if not, then everything remains with us.
- You can get itTax Code of the Russian Federation, article 219 "Social tax deductions" social tax deduction - but only for contracts for five years or more. Plus, a maximum of 15 600 rubles will be returned. For example, let's take the same policy for 50,000, but increase the term to five years. The state will return 13% of the amount, that is, 50,000 rubles × 13% = 6,500. Not much, but this practically covers inflation.
What are the risks of investment life insurance
Before considering a policy, a person should deal with all the risks and pitfalls. The main thing is that, as in investments, income is unpredictable and not guaranteed. Usually, the contract describes a guaranteed income, but often it is so small that it does not even cover inflation. There are also policies without capital protection - they can return less than the person contributed. Other risks should be considered:
- The contract cannot be terminated ahead of schedule without losses. Insurance companies require you to agree to the surrender amount. Let's say that during the first year nothing will be returned from the money deposited, for the second - 50%, and if it is possible to take everything without loss, then only at the very end.
- In case of bankruptcy of the insurer, only the redemption amount will be returned. Investments in investment life insurance policies are not insured in the same way as deposits. If the company has problems, the client will lose some of his money. And he may lose everyone too - if it turns out that the accounts of the insurance company are already empty.
- Low insured amount. The policies are designed in such a way that life is not insured for huge sums of money. Most often, they will pay exactly the amount that the person contributed, possibly with interest. Sometimes it happens that they return the money and add 500,000-1,000,000 rubles on top.
- The tax deduction will not be refunded to everyone. It is important to understand whether the policyholder is entitled to it. Pensioners or simply unemployed people do not pay 13% income tax, so they will have nothing to return.
In addition, the Central Bank looks with suspicion at the entire investment life insurance market. Three quartersReview of key performance indicators of insurers, 2020 / Bank of Russia complaints about the incorrect sale of the product and misleading are accounted for by the ILI policies. Therefore, the head of the regulator Elvira Nabiullina even called forElvira Nabiullina's speech at a meeting of the Council for the Development of the Financial Market under the Federation Council / Bank of Russia limit the sale of complex investment products:
Elvira Nabiullina
Chairman of the Central Bank of the Russian Federation.
When people, for example, have expired the term of the deposit, they are offered in the same bank not to extend the deposit, but to buy alternative, throwing an unprepared person with empty words like "capital protection", "guaranteed profitability ".
How investment life insurance works
Insurance companies divide each client's contribution into several parts - this is how they manage their risks, earn and save money to fulfill the contract.
Organizational expenses
They immediately spend up to a fifth of the cost. The insurance company is obligedBank of Russia Ordinance No. 5055-U “On Minimum (Standard) Requirements for the Conditions and Procedure for Carrying Out Voluntary Life Insurance with the condition of periodic insurance payments (annuities, annuities) and (or) with the participation of the insured in the investment income of the insurer "dated January 11 Of 2019 warn about a specific share. For example, that she will take 5% of the installment, and the counterparty bank will receive 10%.
Reserve
Another 1% of the premium is sent to the reserve - a special account from which the insurance company pays money in the event of, for example, someone's death. The scale effect works: tragedies do not happen very often, so with a large number of policies, you can not postpone from each, but create a separate piggy bank.
Warranty part
The remaining money is divided into two amounts, which are invested in the stock market. What exactly depends on investment strategy and an insurance company. Both proportions and a set of assets must also be prescribed in the contract.
The guarantee part is needed to return the promised capital back. This money is invested in fairly reliable instruments: deposits, government bonds or bonds of large companies.
Investment part
It is invested in more risky and profitable instruments. The set depends on the specific strategy, but usually these are stocks, ETF-funds, futures, options and currencies.
An investment strategy, or program, is the set of assets that an insurance company will invest in. They may differ by risk level, industry and country. The potential profit and the share of insurance depend on the strategy.
How the policy yield is calculated
The insurance company will not give away all the money it earns on investments - it will take some percentage for itself as a reward. Most of the income will go to the policyholder, it is called the "participation rate". Usually the latter is equal to 80–95% of the profit. But sometimes insurance companies promise participation rates above 100%.
As a rule, this ratio speaks of "modified yield". That is, the insurance company itself calculates both the profitability and the coefficient according to a special algorithm, which can no longer be determined using ordinary arithmetic. To understand who and how much will get it, you have to figure out something like this:
The participation rate and commissions of the insurance company greatly affect the income from the policy. But at the same time, one condition is understandable and remains in any contract - you cannot get a loss on the ILI. If the investment did not bring money, then the insurance company will reimburse the premium from its own funds.
Even so, some experts believe that non-professionals shouldn't be looking into all this. For example, Dmitry Yanin, Chairman of the Board of the International Confederation of Consumer Societies, spoke like thisCentral Bank and Russians are disappointed in investment life insurance / Vedomosti about ILI:
Dmitry Yanin
Chairman of the Board of the International Confederation of Consumer Societies.
ILI remains an opaque and low-income product. The investor does not know where his money is actually invested, what real income they bring: he maybe even higher than drawn on paper, but banks and insurers put additional fat into pocket.
What to look for when applying for investment life insurance
The first and most important thing is to check that the insurance and broker there are licenses and permits of the Bank of Russia. The second is to carefully read the contract and evaluate the key parameters.
Contribution conditions
Insurance companies offer different premium amounts and terms, which may not be suitable for everyone. For example, some are ready to open a policy for 30,000 rubles, others accept investments from a million. Someone requires the entire amount to be deposited in one payment, while others allow it to be split over several months.
It is important to pay attention to the term of the contract. The standard period is 3 or 5 years, but the tax deduction will be given only for the second.
Payment terms
Carefully study what exactly is considered an insured event. Even for the "death of the insured" clause, there will always be a list of exceptions. For example, the payment may be refused due to death while practicing extreme sports - such a policy is not suitable for a parachute jumper.
You also need to check other circumstances for which payment may be refused. For example, if you have a chronic illness or serious injury, it is better to report them in advance.
And the main thing is not to forget to check what are the conditions for early termination of the contract. According to lawBank of Russia Ordinance No. 3854-U "On Minimum (Standard) Requirements for the Conditions and Procedure for Carrying Out Certain Types of Voluntary Insurance" dated November 20, 2015 there are 14 days to return all contributions - this is called the cooling-off period. Further, the insurance company will return only part of the amount, the redemption payment. Its specific size must be indicated in the contract.
Investment conditions
To calculate the possible benefit from the policy, you will have to arm yourself with a calculator. If you are not strong in financial theory, then call knowledgeable people. It is important here to understand all the intricacies and be extremely careful. Consider:
- insurer and agent commissions;
- the ratio of the guarantee and investment part of the policy;
- options for investment strategies;
- participation rates for each of them.
Not all details are described in the contract. It makes sense to find out what profitability strategies have brought in the past, in which specific instruments the money is invested, and on what basis they pay the profit.
What is worth remembering
- Investment life insurance is a hybrid of an insurance policy and an investment. It protects money and life, but it is very difficult to understand the instrument.
- It is worth taking a closer look at ILI if you paid off your debts, accumulated a financial cushion and formed your portfolio of securities.
- The state gives tax breaks and deductions for investment life insurance - you can save up to 15,600 rubles.
- Insurance companies offer different combinations of premiums, investment strategies and payout features - you need to research which options are right for you.
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