Unit linked life insurance comes in three main flavours:
With the DVA and VUL, the cash value is dependent on or linked to the value of the securities underlying or "wrapped" in the policy. It is possible to wrap virtually any bankable asset and a surprising variety of non-bankables. In substance it is usually a segregated managed account "wrapped" in an insurance policy, with the insurance structure conferring certain benefits to the investor.
The Frozen Cash Value (FCV) policy has relatively specific applications and is generally for UHNW families, so is not treated specifically here.
The policy that is most widely used is the variable universal life (VUL) insurance policy. The value of the policy follows the increase and decrease in the value of the investments underlying the policy. I.e., the policy cash surrender value as well as the payout in the event of death vary according to the value of the underlying assets. For the VUL and FCV, there is usually a risk component (biometric risk) to the policy1, typically ranging from 1% to 5%. The policyholder may choose periodically (e.g., annually) the investment strategy (conservative, balanced, aggressive, etc). The policyholder generally nominates the asset manager of the underlying assets. A DVA is purchased with a defined maturity or accumulation period, whereas VUL tends to be whole life or have a long accumulation period.
Footnote
1.Most jurisdictions require a death benefit, some do not. The minimum requirement if there is one is generally about 1% – 3% of the cost of the policy. Germany however, requires by law a minimum 10% death benefit to receive tax deferral benefits. There is a general move underway to try to require a real death benefit component to qualify as insurance. In these countries, the requirement under discussion to cover biometric risk seems to be in the 5-10% range.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
