Unit-linked life insurance

What it means

Unit-linked life insurance is an insurance contract in which part of the premium pays for cover against death or injury and the rest is invested in funds chosen by the policyholder. The final amount at the end of the contract is not guaranteed and depends on how those funds perform.

The product bundles two things, insurance and saving, into one package. That is both its strength and its weakness: the client does not have to manage two products, but it is harder to see how much goes on the cover itself, how much on investment management and how much on the intermediary's commission.

The investment part usually consists of the insurer's internal funds or mutual funds run by third-party managers. The investment risk lies with the client, not the insurer. When markets fall, the account value can be lower than the premiums the client has paid in so far.

How it works in practice

Before signing, read the key information document, which must show the total costs and their effect on returns. Initial charges are high in the first years, so cancelling the contract early often returns only a fraction of the premiums paid.

A common alternative is to combine cheap term life cover with separate investing, for example in an ETF or through the third pillar. For a business owner with a mortgage it may make more sense to sort out risk cover first and invest whatever is left.

If the employer pays the policy for an employee, it is generally taxable employment income on which contributions are also due. For the company it is part of payroll costs rather than a tax-free perk, so it is worth considering whether a different employee benefit would be more efficient.

What to watch out for

When an insurance payout or surrender value is paid, tax on the investment gain may be due. In some cases the insurer withholds it, in others it is income that has to be reported in the tax return. The treatment depends on the type of payment and the length of the contract.

These policies are often sold as retirement or children's savings, but with commitments lasting decades. Before signing, check the charges for switching funds, reducing premiums and early termination, and compare the product with what is available through supplementary pension contributions.