How do savings and unit-linked plans work, and what do they cost you?

A savings or unit-linked plan is a life insurance policy that also invests. Your premiums buy units in funds, the insurer takes its charges and the cost of any life cover from the fund, and what you get back depends on how the funds perform.¹ The Central Bank of the UAE treats any product with a cash value as a savings product, and any product that invests in stocks, bonds or mutual funds as unit-linked.²

What are you paying for?

Several layers of charges, and the documents must show every one. The Central Bank’s instructions require all charges to be disclosed, ban hidden charges, and require the illustration to show the values after charges.² The charges in two published Zurich plans show the pattern.

Sources: Futura¹ and the Wealth Accumulation Plan.³

Not every plan works this way. Sukoon’s Purple investment plan page advertises withdrawals “without restrictions or penalties” and access to more than 80 funds.⁴ Salama’s life takaful page describes Hyat Superior and Hyat Secure, lifetime plans where you choose the funds your contributions go into.⁵

Ask for the “effect of charges” or “reduction in yield” figure, which the illustration’s appendix must show.²

Why can stopping early cost you so much?

Because the set-up charges are taken whether you stay or not. If half of your first two years’ premiums go on charges, as in Futura, the fund value after two years is far below what you paid even before fund performance.¹ If you stop or reduce payments, Zurich warns the policy may not cover its ongoing charges and will lapse with no value.¹

The instructions require the surrender value to be fair to both sides: the insurer’s profit on a surrender should not be equal to or greater than it would have earned if you had kept the policy, and the surrender charge must be shared between you and the company.² A surrender value may be set at zero only with a reason given to the regulator.²

Find that page in your documents now. It is the fastest way to see what you would get back.²

How much protection does a savings plan give?

Sometimes very little. The insurer’s actuary works out a protection benefit ratio: the present value of the life cover payouts over the term divided by the present value of the premiums. A plan with a ratio under 10% must carry a bold red warning that “the product has a limited or no protection benefit”, signed by you directly below it.²

If you want life cover for your family, compare the cost of a term policy for the same amount. See term life insurance.

What must the seller show you about the funds?

Past performance for at least five of the funds the instructions call the “Top 5 Funds”, covering at least five years each, or every year since launch for a younger fund, at the sale and every year after, plus a report on the funds you picked. The seller may not choose which funds to show you.² Illustrations must use at least two growth scenarios, the higher one no more than three-month EIBOR plus 4%.² Any rebate a fund manager pays the insurer or adviser belongs to you.²

Ask the seller to show the illustration at the lower growth rate, and to explain what you get back if you stop after five years.

How is the seller paid on a savings plan?

Commission on the savings part is capped at 4.5% of the annual premium for each year of the term, and 90% of one year’s premium in total. On the protection part the cap is 10% a year and 160% in total, and the actuary blends the two by the plan’s protection ratio.² No more than half of the total, and no more than 50% of the annual premium, may be paid in the first year.²

Ask the adviser in writing what they will be paid. If you are being asked to replace an existing plan, read about churning first.