++Universal Life & Unit-Linked Products ++

These are the newer, non-traditional life policy that can have several variations and can be called by other names. The keynotes of universal life (UL) insurance are flexibility for the policy holder and identifiable cost elements. Thus, it involves a flexible-premium concept that separates the "pure" insurance protection (term element) of a life insurance policy from the investment element in the policy.

The policy cash value is set up as a cash value fund (or accumulation fund) to which is credited investment income on the fund, and from which is taken the cost of term insurance (as a mortality charge). This separation of the cash value from the death benefit has been referred to as "unbundling" of the traditional life insurance product. (Please see chart 2).

Premium payments for UL are determined by the policy holder i.e. flexible, but the insurance company usually sets a minimum and maximum premium payment parameters where the policy holder can increase or decrease premium payments at their own discretion.

There are two general types of death benefits under UL:

Option A: a level death benefit, as the cash value increases, the net amount of death protection declines.

Option B: the death benefit is equal to a specified amount selected by the policy holder when the policy is purchased plus the policy's current cash value. Thus, the death benefit will increase if the cash value increases.

The choice between the two options really depends on how much insurance protection is desired relative to the investment element in the policy. Option B provides more death protection relative to cash value than Option A.

The cash value accumulation under UL is credited with an interest rate (usually monthly). There is a guarantee minimum interest rate specified in the policy but what is actually paid depends on the followings:-

" Portfolio Rate, which is set by the insurance company based on the investment performance of its portfolio.

" New Money Approach, is a range of interest rates determined by the insurance company depending on prevailing interest rates environment.

" Indexed, some UL policies index their interest rates to some external benchmark such as long-term government bonds.

Since this is a relatively new concept for the Thai insurance market, the UL policies being offered by different insurance companies can vary considerably, therefore, it would be wise to do your homework thoroughly before you sign on that dotted line.

Unit-Linked Policies As opposed to the "guarantee" or "fixed" principal approach, unit-linked policies allow the policy holder, within limits, to allocate premium payments into one or more separate investment accounts/funds and also to shift, with certain restrictions, the policy cash values among the separate funds. Here again the name can be terribly confusing. The term unit-linked is most common in England and Australia where mutual funds are called "unit trusts" while in the US such policies are called "Variable Life" policies

The amount of the policy cash values and perhaps the death benefit depend on the values or investment performance of the various funds to which the policy holder has allocated the funds under the policy. Hence, the investment decisions and the corresponding investment risks, within the different funds being offered by the insurer fall on the policy holder rather than the insurance company. Hence, unit-linked products are definitely not for amateurs but for those that are fairly proficient with their asset allocation skills, this is as good as it gets to a do-it-yourself investment strategy.

The types of funds that are likely to be offered under unit-linked policies by the insurance companies will differ somewhat but some of the main ones would be Equity, Fixed Income (both long and short-term), Balanced, Flexible and perhaps offshore (as in foreign investment funds, FIF). One important reason for the development of unit-linked insurance was to allow policy holders to manage their own asset allocation strategies but a more compelling reason from the insurance companies' view point is to transfer the risk to the policy holders which would free up their capital reserve

How successful will unit-linked policies be in Thailand really depends on several factors but top of the list will be the long term investment performance of the particular funds in the policy. Let's not forget that both the cash values and death benefits will fluctuate in line with investment performance of the underlying funds. In a rising markets, life is plain sailing but in a prolong recession period, the cash value could theoretically be entirely depleted. This is why many unit-linked policies will contain a guaranteed minimum death benefit.

Moreover, there are still several regulatory issues to be resolved by both the insurance and asset management companies. By having two regulators involved (SEC looking after the mutual funds business and the DOI looking after insurance side) things could get complicated and many insurance companies feel that Unit-linked policies won't be ready in 2004. The main challenges for the insurers will not be so much about how to market such sophisticated products but to first get their sales force ready. After all, only sale people with Investment Planning (IP) license shall be authorized to sell such products. It remains to be seen who shall be the main driving force behind the success of unit-linked products in Thailand.