INVESTMENT.RAKCER.ID – You may have wondered where the premiums you pay for unit-linked life insurance actually go.
Are they used solely for insurance coverage, or are there other costs involved?
To reduce future risks, policyholders need to be smart and well-informed about the insurance products they purchase.
This is important so that customers can clearly understand whether the benefits they receive are in line with the premiums they pay and whether the product truly suits their needs.
According to information from the Financial Services Authority, unit-linked life insurance combines protection and investment functions in a single product.
Although it offers dual benefits, customers must understand that unit-linked insurance is primarily an insurance product.
Therefore, protection and risk coverage should be prioritized over potential investment returns when purchasing a unit-linked life insurance policy.
Customers should also be aware that the potential investment value of unit-linked products depends on capital market conditions. Moreover, past investment performance does not reflect future investment performance.
How Unit-Linked Insurance Works Like insurance products in general, unit-linked life insurance requires customers to pay premiums on a regular basis.
The premiums paid are allocated for protection and to cover various other costs charged by the insurance company, including investments in selected investment funds chosen by the policyholder.
Policyholders may also add investment funds (top-ups) according to their preferences.
Allocation of Unit-Linked Life Insurance Premiums The premiums paid for unit-linked life insurance are allocated as follows:
1. Insurance Costs
Insurance costs, or the cost of insurance, are fees charged to obtain the basic benefits of unit-linked life insurance, namely protection in the form of a sum assured in the event the insured passes away.
The amount of insurance cost depends heavily on factors such as gender, entry age, coverage period, desired sum assured, and any pre-existing medical conditions.
The older a person is at the time of purchasing the policy, the higher the insurance cost.Another factor that can affect insurance costs is the presence of pre-existing conditions, which may result in higher premiums compared to standard rates.
2. Rider or Additional Benefit Costs
In addition to the basic life insurance coverage, premiums are also allocated to optional additional benefits, commonly known as riders.
These rider costs apply as long as the policyholder chooses to retain the additional benefits and can be discontinued at any time. Examples of riders include critical illness insurance, health insurance, accident insurance, and others.
3. Investment Value
As the name suggests, unit-linked life insurance offers both life protection and potential investment value in the form of investment units.
Therefore, a portion of the premium is allocated toward investment value. The investment instruments included in unit-linked insurance are funds managed by insurance companies or investment management firms affiliated with the insurance provider.
4. Acquisition Costs
Acquisition costs are fees charged for services provided by the insurance company. These include operational expenses, marketing costs, and other related services.
Acquisition fees are generally charged for three to five years. The percentage is higher in the early years of the policy and gradually decreases over time.
5. Administrative Fees
These fees cover routine monthly operational services such as premium due notifications, premium collection, contribution processing, investment balance information, and other communications via SMS, email, and similar channels.
6. Investment Management Fees
The funds paid by customers and received by the insurance company are forwarded to a custodian bank for safekeeping, then managed by an investment management company.
Because multiple parties are involved, unit-linked premiums also include investment management fees to ensure the funds are professionally managed for potential investment growth.
7. Withdrawal Fees
Withdrawal fees are charged when customers withdraw their investment value. The amount varies by insurance company, generally ranging from 0% to 30% of the withdrawn amount.
Some insurance companies apply withdrawal fees only during the early policy years. This policy aims to discourage early withdrawals and encourage customers to maintain their investments for the long term.