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Life insurance in the USA: what, where and how much to buy?

Nadezhda received an annual bonus and decided to put this money into a deposit. The bank employee suggested paying attention to the program of investment life insurance (LIS), which can bring more income. We tell you what features of ILI are important to know in order to make an informed decision.

What is ISJ?

It is life insurance and investment at the same time. The ILI policy provides an opportunity to receive investment income and at the same time guarantees an insurance payment in the event of death.

ILI income may depend on changes in the value of government securities, shares, bonds and other financial instruments.

If the insurer’s investment strategy turns out to be successful, then at the end of the contract term you will be able to receive not only the deposited money, but also additional investment income. Sometimes it turns out to be higher than the interest on bank deposits.

But this income is not guaranteed. It may happen that you do not earn anything or even lose.

What is important to know about ISI?

Before taking out an investment life insurance policy, it is worth considering:

  • Investments in ILI are not included in the deposit insurance system . If the insurer goes bankrupt, you may lose some or all of your deposited money. How to act in order to increase your chances of returning your investment, you can read in the material ” My insurance company’s license was revoked: what to do “.
  • There is no guarantee of additional income. Unlike bank deposits, the percentage of which is known in advance, the income from ILI is unpredictable. For example, people whose policies ended in the first quarter of 2019 received on average less than 3% per annum on their investments. Sometimes the terms of the contract prescribe a minimum guaranteed income, but it is so small that it does not even cover inflation .
  • At the conclusion of the contract, you will be told what percentage the buyers of the same policies received in the last three years. But even if returns have been high in the past, they may not necessarily be the same in the future.
  • There are also such ILI agreements, according to which at the end of the policy period you can get back even less than you paid. They are called  policies without capital protection .
  • It is impossible to terminate the contract without loss.  You can close the bank deposit at any time and withdraw your money – however, interest is usually lost. In most cases, it will be possible to return all investments in ILI only  during the cooling period .
  • For insurances for which you make only one installment in the amount of up to 1.5 million rubles, the cooling period is 30 days from the date of conclusion of the contract. If the payment is equal to this limit or exceeds it, the period is reduced to 14 days.
  • When the contract provides for several installments, the cooling period lasts until you make the third installment, but not less than four weeks. True, if the first two payments in total are equal to or exceed 1.5 million rubles, then the grace period is again reduced to 14 days from the date of purchase of the policy.
  • If you want to terminate the ILI contract after the cooling period, you will be paid only a part of the money, which is called the redemption amount. The less time has passed since the purchase of the policy, the smaller the amount of the redemption amount will be. For example, the entire first year it can be zero – that is, if you terminate the contract during this period, you will not receive anything.

All of the above features of investment insurance contracts must be spelled out in the memo . It must be carefully studied and signed before concluding an ILI agreement.

The memo also contains a table of redemption amounts – it allows you to understand what payment you can receive depending on the date of termination of the ILI agreement.

In addition, this document prescribes in which assets the insurance company will invest your money and how your investment income will be calculated.

What is income from ILI?

Almost all insurance companies offer ILI policies with capital protection . This means that in any situation on the stock market, the client will be able to fully return all the money invested at the end of the policy. In other words, you may not receive income, but the buyer of the policy will not face losses either.

Nadezhda invested 200,000 rubles for 5 years in an ILI policy with capital protection. If during this time some crises occur in the securities market or the insurance company simply chooses assets poorly, instead of income, investments will bring losses. Then Nadezhda will get her 200,000 rubles back and will not earn anything.

Part of the cost of the policy goes to the costs of the insurance company itself and to the payment of a commission to the agent who sold the policy. You are obliged to warn what share they will take for themselves. For example, an agent bank can receive 10-15% of the premium, and an insurance company – about 5%. These costs greatly reduce the profitability of the policy.

A small percentage of the cost of the ILI policy (usually about 1%) is sent by the insurer  to the reserve . From this reserve, the company pays compensation in the event of the death of a client .

Of the 200,000 rubles that Nadezhda contributed, 19% immediately went to pay the commissions of the bank and the insurance company, 1% was sent to the reserve for insurance against the risk of death. Thus, investments will be directed: 200,000 × (100% – 19% – 1%) = 160,000 rubles.

In order to save the amount of contributions made under any circumstances in the stock market, insurers divide investments into two parts:  guarantee  and  investment . 

The insurer invests the guarantee part in reliable financial instruments with a fixed interest — in deposits, government bonds, as well as in corporate bonds of leading Russian companies. For 3-5 years of the policy, these instruments generate income that will allow the insurer to return to the person no less than the amount that he contributed.

The insurance company directs the investment part to more risky, but also potentially more profitable instruments – Russian and foreign stocks and bonds, currency and exchange-traded funds , futures and options . They are able to bring additional income – and the insurance company will accrue a share of this income to the policyholder.

The share of investment income that the policyholder will receive is called the participation rate . The higher the participation rate, the greater the potential benefit of the ILI buyer.

As a rule, the policyholder has the right to choose an investment program himself . This program can be linked to a specific industry (say, metallurgy), instruments (say, foreign bonds), or country (say, US IT stocks). The size of the participation rate often varies greatly depending on the COLI program.

From the money of Nadezhda, the insurance company made 100,000 rubles as a guarantee part, and sent 60,000 rubles for high-risk investments. The client chose an investment program with a participation rate of 90%.

Within 5 years, the situation on the stock market was favorable and the average return on investments was 10% per annum. Profit from the investment part for the entire period of the policy was equal to 36,631 rubles. And Nadezhda received a final payment in the amount of: 200,000 + 36,631 × 90% = 232,968 rubles.

True, the high-risk investment part can bring not income, but losses. Then the owner of the policy will not earn anything, and the insurance company will cover his minus at the expense of income from investments of the guarantee part.

It is impossible to accurately estimate the future income on the policy, but it is worth finding out the profitability of various investment programs in the past and making at least approximate calculations.

Nadezhda’s income under the ILI policy amounted to 32,968 rubles for five years. She would have received about the same amount if she had deposited 200,000 rubles in a bank at 3% per annum with an annual capitalization of interest (that is, income for the year would be added to the deposit amount and interest would also accrue on it).

When choosing what to invest in, evaluate not only the profit promised by the insurer and the profitability of similar policies for previous years, but also other factors. For example, find out under what conditions you have the right to terminate the ILI agreement before it ends.

I urgently need money. Is it possible to return investments before the expiration of the ILI policy?

Most ILI contracts provide for an insurance payment for the risk of survival . That is, you will be able to get back all the money deposited plus investment income (if any) only at the end of the policy term.

For some ILI policies, insurance companies pay investment income once a year. Look for such offers if you do not want to wait 3-5 years to return at least part of the investment.

Terminating the ILI agreement ahead of schedule is extremely unprofitable: if the cooling period is over, only part of the money will be returned to you –  the redemption amount . It can be much less than the contributions that you have made, and even equal to zero. Carefully study the table of redemption amounts  before buying a policy. It is important to understand in advance what you will have to count on if you urgently need money.

Most often, during the validity of the policy, companies make payments only for insured events.