Index linked policies | What are they and what are the risks

The index linked policies are life insurance policies with which insurance premiums are invested in instruments whose returns are linked to the performance of one or more indices. As the trend of the performance indices is uncertain by definition, if it is not suitable to the risk profile of the subscriber, the policy is often accompanied by a guarantee on the capital that has been invested. In this case the greater part of the money is invested in zero coupon bonds and the remainder is invested in structured products linked to the indices and are therefore more risky.

Sudden Wealth

Sudden Wealth

In addition, for index linked policies are estimated implicit and explicit costs. The former are very clear in the statements that concern the classic illustrative and expenses related to an insurance policy. The implicit costs are those relating to instruments on which invests the policy. Zero coupon bonds for this feature usually have a higher price than the market and then structured products which have a not predictable cost because usually incorporate tools financial derivatives.

Index Linked Policies

Index Linked Policies

The index linked policies do not enjoy a good reputation because they have proven not too many years ago to be able to be a fake insurance form without anyone noticing. This was the case for the Lehman Brothers and the Icelandic banks, there was no guarantee. These are extreme cases, however the risk inherent in the investment of money with this type of insurance is very high and remains the responsibility of the contractor. If you do not agree with the bank of minimum guarantees, the principal at maturity may be lower than the sum of the premiums paid. Finally, it is extremely important not to confuse the index linked policies with unit linked policies. Although in both cases they are forms of insurance with high financial content for index linked return is tied to an equity index. In the second the connection is a financial fund.

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