Investment life insurance: real income or scam?

To know how investment risks are insured, you just need to refer to the legislation on property type of insurance because that is what they belong to.

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This information will help you understand what types of investment risk insurance exist, what risks are insured, and what the effectiveness of this type of insurance is.

What is ISIS?

I have already mentioned investment insurance in my article about endowment life insurance. The essence of the ILI is as follows: you deposit your savings into the account of the insurance company for at least 3 years . The client has the right to decide whether to deposit the entire amount at once or split it into several parts, replenishing the account at regular intervals throughout the entire investment insurance period. In turn, the company undertakes to pay you the invested funds in full and investment income, if any, upon completion of the policy.

What is insured?

The objects of all types of personal insurance are the life and health of the person signing the contract with the insurance company. The purpose of the ILI is not only to protect clients from financial losses incurred as a result of an insured event, but also to accumulate and increase their funds. This type of voluntary savings insurance is an opportunity to accumulate a certain amount of funds during the validity period of the insurance policy and receive additional income as a result of asset management. If management companies manage to successfully invest clients’ funds, then the amount of the initial deposit will increase annually by at least 15%.

It turns out that participation in the investment insurance program is a combination of life insurance with receiving additional income from passive participation in the assets offered by the management company.

For the entire period of validity of the ILI, you will be insured against any risks - death, illness, accidents. The more risks are included in the “insurance cover”, the more expensive the insurance will be.

Components of the contribution

Conventionally, your money can be divided into two parts : investment and guaranteed . Insurance companies invest the latter in instruments that provide guaranteed income, for example, in bank deposits. The amount of the guaranteed fund , increased by the income received as a result of investment, must be equal to the original amount of funds invested in the insurance account.

the second, investment , part in various instruments with a high level of profitability. Provided that the chosen strategy is successful, you will receive not only the invested funds, but also additional income. If the chosen path is unsuccessful, only the body of the deposit will be returned to you. It turns out that even with the most unfavorable outcome, you do not risk anything.

The opportunity to invest is presented by companies as an exceptional benefit, since you will be able to invest your savings in precious metals, stocks, oil and other instruments. By the way, about how to work with securities correctly, read my article on investing in stocks. However, clients are almost never told that over time the amount of the initial investment of the ILI will be eroded by inflation .

Western experience

In foreign practice, investment insurance is implemented at 3 levels:

• National alliances and companies working with the largest projects and complex cases, including expropriation, nationalization, and other political threats. Among them are the companies Hermes Kreditversicherung (Germany), COFAC (France) and many others.
• International associations.
• Private companies offering customized insurance services to investors.

The United States boasts a carefully thought-out system for the protection of foreign deposits, organized with the participation of OPIC. Since 1969, this corporation has already insured about 1% of the projects of American entrepreneurs operating in 140 countries.

Services are provided by OPIC exclusively to treaty countries with the United States. Russia did this back in 1992.

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ILI programs: basic operating principles

By becoming a participant in the ILI program, you get the opportunity to increase your money by investing it in various financial instruments. But it is important to understand the features :

1. You can expect to receive additional income from investing, but not from completed trading transactions.
2. When making the next contribution, your funds will be divided into two parts - one will replenish the accumulated capital, and the second will be used for investment purposes.
3. You can independently choose where to invest the money, if this is specified in the insurance contract.
4. You have the right to terminate the contract early and get your money back. But be prepared for the fact that part of the funds will be spent on paying penalties established by the company.
5. Payment of the insurance premium can be a one-time payment or in installments. In the latter case, payments can be made monthly, quarterly or semi-annually. Most often, companies encourage policyholders who pay the entire amount by providing them with significant discounts.
6. You can apply for an ILI policy for any period. The main thing is that its validity period is at least 3 years . The role of the policyholder may be an individual who has reached the age of majority. The upper age limit in most cases is 75 years. Many companies offer life and health insurance programs for children, but they are not investment programs.

Risks

Life insurance is a rather risky financial instrument. Risks are associated with the possible bankruptcy of the company and the possible depreciation of funds. However, if you choose the right insurer, investment risks can be significantly minimized.

For the investor. The main risk is a low level of investment income and the inability to “exit” the investment instrument, that is, terminate the contract early without loss. It is also dangerous to trust funds to little-known companies that are not market leaders and do not have experience in effective investing.

For the bank. If an insurance policy is issued to a bank borrower, and the insurance company goes bankrupt or simply disappears from the market, the lender may suffer seriously. In the event of a sudden illness or death of a client, there is a risk that he will not be able to fulfill his obligations. This is why banks most often insist that the borrower be insured by trusted partner companies.

How to become a participant in the ILI program?

When signing a life insurance contract, you must provide the company with your passport information . This is necessary to confirm your identity and age. I draw your attention to the fact that both residents and non-residents of the Russian Federation who permanently reside on its territory can participate in the investment insurance program.

Before you sign a contract, consider what risks you want included in your policy. Often, the first two risks in the list are included in the policy by default and are mandatory, while the third is optional and affects the final cost of the document:

• survival until the expiration of the contract;
• death of the policyholder as a result of an accident or natural causes;
• injury, mutilation, loss of capacity.

Civil legislation lists the reasons why insurers may refuse to pay compensation to a client:

• neglect of the procedure for notifying the insurance agent about an insured event;
• negligence or intentional creation of conditions for the occurrence of an insured event in order to obtain a benefit;
• the occurrence of an insured event as a result of a nuclear explosion, military operations, civil unrest, strikes;
• other cases noted in the contract.

Amounts

In accordance with the terms of the insurance contract, the amount of payments may be different:

• up to 300% of the total insured amount with payment of investment income - if the insured person died as a result of an accident;
• from 100% of the total insured amount and investment income - if the person died of natural causes;
• payments due to injury to health are determined separately for each case and are calculated in direct proportion to the amount deposited into the account.

Cost-effectiveness assessment

The effectiveness of investments is considered to be their full compliance with the original goals of the business project, as well as with all the ideological, property and financial interests of the project participants.

Russian legislation does not require every business in which an investor invests to be checked for economic efficiency.

However, this is of interest to the investor himself, so this practice is not the least important in this area of ​​activity.

To calculate the efficiency of insurance for such projects, the following variables are taken:

All this is formalized and calculated using the formula:

To determine the net capital flow during the period of risk preservation, the following formula applies:

Where:

After the calculations, the conditions under which the insurance contract will be concluded must be determined, where the components of insurance protection in relation to specific investment risks are specifically indicated.

Specific and specific insurance cases may be indicated, or only their general criteria without specifics may be prescribed and specified.

What is stated in the contract?

The contract concluded between the insurance agency and the policyholder comes into force after it is signed by both parties and the first payment .

According to the terms of the contract, the policyholder must be provided with the following documents:

• sample contract;
• insurance rules;
• policy.

Documentation confirming the fact of a person’s participation in the ILI program is issued to the policyholder personally or sent by mail.

Verification of documents

Before entering into a contract, pay attention to a few points:

• clear deadlines for the completion of the selected insurance program;
• the way the company divides the funds it receives (what percentage of contributions is involved in investment activities);
• a list of all possible insurance risks.

In addition, the contract must contain information with contact and address details of the policyholder and the company , as well as details for which payments will be made.

The signed agreement is certified by the signature of an authorized representative and a seal. Together with the insurance policy, you need to keep the contract until the insured event occurs or the program expires. After this, the documents are transferred to the insurers in order to receive the appropriate payments.

Peculiarities

There are several types of investment protection insurance:

• insurance of investments against accidents (fires, accidents, natural disasters);
• protection of foreign investors from losses and material losses resulting from nationalization or confiscation of property, civil and other wars, problems with currency transfer, export of capital and other political risks;
• protection of investment loans and credits from the risk of borrower insolvency.

International investment insurance

If an investor invests his finances in the development of economic entities in other countries, then he needs to protect his investments from various unforeseen situations. There are several types of risks:

• political crises within the country receiving investments;
• nationalization of the enterprise;
• various economic shifts: a sharp increase in inflation or a drop in GDP;
• non-compliance with the terms of the contract by the country in which the capital is invested.

Due to differences in the laws of countries, insuring international investments is considered a rather complex procedure. There are no general insurance conditions, therefore such economic relations require separate agreements, where each party puts forward its own conditions.

But you shouldn’t be afraid of this, in any case they are regulated by international law, and if the country receiving investments violates the terms established in the agreement, you can appeal to the International Arbitration Court.

An insured event has occurred: what to do?

If the occurrence of an insured event specified in the ILI agreement could not be avoided, you or your beneficiary should submit a request to the company that issued the policy, supporting it with the following documents :

• a certificate issued by a medical institution confirming the fact of injury;
• death certificate of the insured person (in this case, the documents are submitted by the beneficiary);
• a statement written according to the established template;
• policy;
• the original contract signed by the insurance company.

The provided documentation is verified , after which, if the application is approved, you or your beneficiary will be paid insurance compensation in the amount specified in the contract.

Current ILI programs: review of the best

Today, almost every major insurance company will offer you investment health and life insurance programs. For an inexperienced person, such a variety of offers can literally confuse them. To make it easier for you to find the optimal policy at an affordable price, carefully read my review of companies .

BCS also has a good offer. Here they offer to invest from 50,000 rubles. for a period of 5-7 years, while offering interesting investment products with high returns. For example, in ILI “ First the iShares Global Tech ETF is selected as the underlying asset , and in “ Money Management ” the S&P Economic Cycle Factor Rotator Index is selected . This option is suitable for those who do not want to invest in the Russian market.

If we compare the listed companies, the leader in terms of contract duration is RESO-Garantiya . Alfa insurance offers a larger number of strategies and high payments when an insured event occurs, but the age of the insured person is strictly limited. As for BCS , this is an excellent option for investing in Western assets. According to other conditions, it is also not inferior to the companies listed in the table.

To use it or not?

By becoming a consumer of insurance products, you receive a number of benefits in the form of a guaranteed return of capital, a possible high return on investment and a tax deduction . Because life insurance policy payments are not taxable income, life insurance policy owners may receive certain benefits. Tax deductions for program participants are 13% . They can be obtained from an amount of up to 120 thousand rubles. That is, for a year of owning the policy, you have the right to a refund of taxes paid to the state treasury in the amount of up to 15.6 thousand rubles.

The only thing you should know is that investment policies do not participate in the state deposit insurance program for individuals. Also consider the fact that the profitability of these products may be an order of magnitude lower than expected.

Unlike bank deposits, the termination of insurance policies entails considerable monetary losses . Early termination of ILI agreements leads to the “burning out” of up to 80% of accumulated funds. I would not recommend investment policies to investors with capital not exceeding 1.4 million rubles. Such investments are more suitable for wealthy clients whose deposits cannot be covered by the deposit insurance system. If your goal is only to save money from inflation, you can split up large capital into parts of 1,300,000 rubles (we leave a reserve for receiving an income of 8% per annum) and put them in 2-5 large commercial banks.

The essence of investment insurance

We are talking about compensation for financial investments in the event of loss of funds, non-receipt (less receipt) of profit from an investment project (in the Russian Federation or abroad, if this is insurance for foreign investments). The form of these attachments may vary:

• direct investment is the purchase of equipment, real estate, materials, raw materials;
• stock investments – acquisition of the right to part of the profit (shares, for example);
• purchase of property rights (international leasing);
• lending to the recipient of the investment.

Investment insurance is, first of all, a prevention of the onset of financial risk, which can also manifest itself in different forms. When an investor loses his money or profits due to fluctuations in the foreign exchange market, it is called foreign exchange risk. If the cause of the loss was political circumstances or natural force majeure events, it will be classified as catastrophic.

Commercial risk is the financial failure of a project associated with internal economic conditions (competitive environment). They also distinguish between market and interest rate risks, both of which are associated with changes in the financial instruments of the market.

Types of investment risk insurance

Financial investment insurance is presented in world practice in three program options:

• basic insurance (coverage applies to property – construction, acquired assets);
• insurance of foreign investments (the emphasis is on political risks; without government support this program does not work);
• insurance in case of creditor insolvency.

There is another classification of programs that consider investments as an object of insurance - according to the degree of risk. Firstly, it will be considered acceptable provided that the investor loses only the expected profit. Secondly, it is considered critical when the investor does not receive either his money or the predicted income after the implementation of the investment project. A catastrophic situation leads to the loss of the investment itself and the funds that it was supposed to bring to the investor.

Need to pay attention

Recently, more and more bank clients say that investment life insurance contracts were presented to them as complete analogues of classic deposits, but with slightly higher profitability. A person who understands the difference between these two instruments for accumulating funds is ready to soberly evaluate the option of investing in ILI. If this method of investing is a discovery for you, but you are still ready to consider its possibilities, then you need to pay attention to a number of nuances .

The fact is that greater profitability of ILI programs is achieved by investing the deposits of insured persons. Unfortunately, not all investment strategies offered by insurers are transparent. Policyholders do not have the opportunity to independently track the trend dynamics of a particular fund, so they have to trust the “word of honor” of insurers. As a rule, companies show only part of the indicators, and therefore it is impossible to be 100% sure that the chosen investment strategy will be successful.

In this case, policyholders have only two options :

1. Search for products tied to the cost of specific goods or funds yourself in publicly available sources.
2. Trust the insurance company's specialists.

Key points

The main metric to look at when choosing an investment strategy is the participation rate , which shows the share of the strategy's growth that the policyholder can receive. This indicator can vary significantly. For example, if the coefficient is 100%, this means that the policyholder’s income is equal to the profitability of the selected fund. Please note whether the percentage of return multiplied by the participation rate will apply only to the portion of funds allocated to investment or to the entire contribution.

Many insurance companies provide clients with the option of changing the investment strategy during the term of the contract or fixing the funds earned . Most often, you can use these services only once a year. I must admit that this is very convenient , because you will always have the opportunity to change the investment fund if the initial strategy does not turn out to be very effective. But it makes sense to resort to fixing investment income when the current profitability of funds is high, but its decline is predicted in the near future.

Choose insurance programs from those agencies whose website provides the opportunity to create a personal account . This will not only simplify control over the dynamics of funds, help to respond to trend changes in a timely manner, but will also provide an opportunity to adjust the initial agreement (increase the deposit amount or change the current strategy).

Advantages of ILI

So that you can decide whether to become a participant in the investment life insurance program or try to make money by investing in other financial instruments, I suggest you evaluate the advantages and disadvantages of ILI. By the way, if, having reached this point in the article, you have managed to understand that investment insurance does not attract you, you may be interested in my article “Where is the best place to open an individual investment account.” In the meantime, let’s look at the advantages of ILI:

1. Insurance payments upon the occurrence of risk events are not subject to taxes .
2. Policy premiums cannot be seized, seized, or divided because they are not property .
3. Insurance payments are not inherited, but are made directly .
4. Participation in the ILI program provides the right to receive an insurance deduction in the amount of 13% of contributions for 120,000 rubles deposited into the insurance account.
5. ILI contracts are concluded for a long period, and the cost of contributions remains fixed even in cases when the health of the policyholder declines.
6. The need to regularly replenish the insurance account and the inability to spend accumulated money ahead of schedule develop financial discipline .

Disadvantages of ILI

In order to assess the pros and cons of ILI programs as soberly as possible, let’s put the following disadvantages :

1. The deposit insurance system for individuals does not apply to ILI agreements. Because investment life insurance is a product of an insurance company and not a bank, your deposits may not be protected . Considering that contracts are concluded for quite long periods (at least 3 years), no one can guarantee that the insurance company will not go bankrupt and your money will not disappear along with it.
2. If the ILI agreement is terminated, you will have to pay decent compensation to the insurance company. Often redemption amounts reach 80% of the total deposit amount.
3. Companies do not guarantee that you will receive investment income. In addition, it is impossible to find out what the profitability of the insurer's investment activities is. Therefore, you will have to believe the numbers that the company provides.
4. Insurance companies identify a separate group of persons with whom contracts cannot be concluded by default. These include people with disabilities and those currently undergoing outpatient treatment. Before signing a contract with the insurer, you need to inform him about all your diseases . The insurance agent never asks about illnesses, and those insured may not be aware of the need to provide such information. As a result, when an insured event occurs, a person is denied payments, declaring the contract invalid.
5. All contracts contain a considerable list of cases that cannot be considered insurance. Thus, an accident that occurred as a result of the insured’s intoxication, HIV infection, or an injury received while playing sports are all non-insurable events for which insurance companies will not pay compensation.
6. To prove the occurrence of an insured event, you will have to work hard to collect documents.
7. However, even the availability of all necessary documentation does not guarantee You will receive your funds soon. Insurance companies check the package of documents within 14 days of receiving them, and only then begin making payments. Moreover, it takes up to 10 days to implement the latter.

   

8. The more insurance risks contained in the policy, the higher its cost. Pay attention to exactly what risks are included in your contract. It is quite possible that the probability of their occurrence will be close to zero, and they will “increase” the cost of the policy by a tidy sum.

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