SAVING of PROTECTION INVESTMENT

Lily G. Nababan Contributor/Jakarta (The Jakarta Post, 06/12/07)
In the past, people saved their money at a bank and took out insurance to protect themselves and their families. Wealthy people could invest in the capital market.
In 1998, under the influence of Western Europe, unit-linked products came to be introduced. The unit-linked plan is an insurance product that puts together insurance and investment. If you are a holder of a unit-linked product, you can enjoy double benefits, namely insurance protection and investment.
Since 1998, unit-linked product purchases have risen 50 percent per year. In 2002, these products enjoyed rapid development, marked with the increase in the number of players in this business, namely from three companies to 16. According to the Indonesian Insurance Council, over the past two years unit-linked product purchases have risen 150 percent.
Data compiled by the Indonesian Life Insurance Association (AAJI) shows that as of the end of 2002, the value of unit-linked products reached Rp 684,310 billion. In 2004, meanwhile, unit-linked product sales were worth Rp 3.3 trillion. In 2005, this value rose to Rp 6.07 trillion while up to June 2007 the value reached Rp 6.66 trillion. According to AAJI, the growth of unit-linked products per year stands at 30 percent. This means that more people are making investments and taking out insurance.
A unit-linked product is quite attractive as it produces a return although the investment risk is with the policy¬holder. The return on this product is more attractive than the interest on bank deposits and other traditional products. The return may be 25 to 30 percent above a time deposit interest rate, especially given the fact that interest on time deposits is subject to tax.
For insurance players, unit-linked product-, are a profitable business. Ninety percent of a
life insurance company's earnings on premiums come from unit-linked products. Companies marketing unit-linked products include Allianz Life 'Indonesia, AIG Life, Prudential Life Insurance, Manulife Indonesia, Sun Life Financial Indonesia, Sequin Life, Jiwasraya, MAA Life, AIA Indonesia, Antra CMG Life and AXA Mandiri Financial Services.
According to Rianto A. Djojosugito, chief financial officer of Allianz Life Indonesia, prior to the introduction of unit-linked products, a person wishing to invest and take out insurance had to purchase two different products. For invest¬ment a person would, for example, buy mutual funds while for protection he would take out insurance. The purest form of insurance is insurance that gives, only protection without any savings element. Premiums are low and the pol¬icy can be renewed annually, while if it is terminated half way, no money will be reimbursed to the policyholder.
In Indonesia, however, insurance of this type is not very popular. The types of insurance usually sold are life, dwiguna (dual purpose), and life and education combined.
"That is actually also a savings element but the insurance is packaged traditionally so the cash value is guaranteed," said Rianto. Today, many insurance companies have abandoned such products because of the presence of unit-linked products.
* A unit-linked product policyholder does not need to go to two different parties but can get both products in one pack¬age from one company.
In the past, for example, someone would take out life insurance and pay a premium of Rp 500,000 per year and upon his death there would be a Rp 100 million payout. If the policy was terminated in the first or second year, the policyholder got nothing. In addition, the policyholder did not know the details of what his premiums paid for. With a unit-linked product, however, everything is transparent. Take, for example, a premium
of Rp 100,000 per month. An insurance company will explain the percentage of the premium that goes toward investment and the amount for cost of insurance (COI), administration charge and other fees. "The bigger the protection requested, the bigger the premium and amount of monthly deductions," Rianto said.
COI changes according to age and behavior of the client (depending on the policy). "Usually a company will say any time the rate can change because from time to time the company will consider the mortality behavior of a client's portfolio," Rianto said. If the mortality rate drops, the COI rate may be lowered or raised. The percentage of COI is determined by each company and depends on the policy taken out. The administration charge is fixed, for example Rp 25,000 per month, but also fol¬lows inflation trends.
Premiums can be paid in advance in a lump sum or on a regular basis, (monthly, quarterly, half-yearly or annually). After the COI and other charges are deducted, the remaining funds allocated for investment will be clearly presented. The client decides on the form of investment, for example between a fixed income alone or a combination of equity and money market. "A customer can also change his choice of invest¬ment halfway," Rianto said.
There are several unit-linked products available. "The products are packaged in a variety of ways but in essence they are the same. The naming of these products is more for packaging purposes and is influenced by local factors," Rianto said. The same products sold through a different channel have different names. Allianz, for example, sells a syariah unit-linked product called AlliSya or Smart Link Money Market Fund. This product is given a different name when Allianz collabo¬rates with a bank. Allianz currently collaborates with three banks, namely Bank Permata, Standard Chartered Bank and Bank Danamon. Up to September 2007, unit-linked products contributed premium earnings of Rp 1.1 trillion or 63 percent to the company!s total earnings of Rp 1.8 trillion. At present, Allianz occupies second position in Indonesia in terms of unit-linked earnings. First position goes to Prudential Life.
Other insurance players have packaged unit-linked products available. Some claim their annual premium is not too high and has many features. Others package their products in accordance with five future goals, namely pension, protection, education, savings and multi-purpose. Some companies target the lower middle market, therefore offering more affordable premiums starting from Rp 150,000. If a client wishes to change the type of investment, he can do so free of charge. The type of fund can be changed three times a year, all free of charge.
It is these elements that, according to Rianto, make a unit-linked product advantageous. First, transparency. The process is open to a client so that he knows the details of where his money is going. "This is in keeping with the present tendency as the public has become increasingly more critical," said Rianto. Second, flexibility, which also includes the freedom of a customer to change the premium rate when, for example, he is retrenched or contracts a serious illness, in which case paying a higher premium would be difficult. "The policy need not be terminated, the premium can just be made smaller," said Rianto.
A client can also withdraw a portion of his savings without having to worry that his policy will be terminated. He can even increase the premium. A unit-linked product does not start with insurance money but from a premium, Rianto added. "It depends on how much a customer can afford and what protection he wants and at what level," he said. If a client asks for protection at too high a level, the premium may need to be raised or the protection reduced.

Posted by Taurida Adinda at 9:10 PM