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Expat savings plans, unit linked insurance plans, offshore pensions: What are the benefits and drawbacks?

Understand the benefits and drawbacks of expat savings plans, unit linked insurance plans, and offshore pensions for effective financial structure.

We have talked before about expat savings plans, and have reviewed many different ones such as RL360 PIMS, Zurich Vista, Friends Provident International and other similar products.

These products go by many names, expat savings plans, unit linked insurance plans, offshore pensions, etc, and they are typically offered by banks, financial advisors, and wealth managers.

All of them are some sort of insurance investment plans that help expats save money while abroad.

In this article we will dive deeper into the benefits and drawbacks of these plans to help you make an educated decision whether they are right for you and your financial needs.

This article is written for informational purposes only and should not be counted on as formal financial advice.

For more detailed financial counsel, it is highly recommended you consult with a professional financial planner who has experience working with expats and high net worth individuals in similar circumstances.

If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or WhatsApp (+44-7393-450-837).

This includes people who are unhappy with their current plans.

What are expat savings plans, unit linked insurance plans, and offshore pensions?

As the name implies, an expat savings plan is a specific kind of savings account created with expats in mind.

For the most part, these take the shape of insurance investment plans for expats offered by banks, brokers, and other financial institutions, as well as by expat financial counselors and wealth managers.

As such, for the purposes of this article, we will refer to expat savings plans, unit linked insurance plans, or offshore pensions interchangeably as they are mostly the same thing.

They can also go by other names such as expat savings accounts, offshore savings plans, among others.

An expat savings plan is designed to make it simpler for you to save money while living abroad. A local bank or internet brokerage might be used to start an expat savings plan.

Expat savings plans and unit linked insurance plans are offered by many banks, brokers, and financial advisors.
Expat savings plans and unit linked insurance plans are offered by many banks, brokers, and financial advisors. | Photo: Pexels

How do they work?

A unit-linked insurance policy is a combination of insurance and investment. It combines the features of both an endowment plan and a pension plan in one product. The money you invest in such plans earns money like equity mutual funds, but it also provides life cover at cost like regular insurance policies.

There are certain distinctions among various types of plans. Some programs won’t start paying interest on your account until you have a particular amount in it.

Some plans provide you interest on your balance whenever it reaches a specific amount.

However, many plans have a contributions period, with the smallest contribution period typically being 5 years and the longest contribution period typically being 25 to 30 years. The 20- to 30-year savings plans are often more prevalent in expat markets.

An insurance package known as a unit linked insurance plan combines investing and insurance advantages into a single plan.

Unit linked insurance plans offer life insurance, which could be seen as an advantage over conventional wealth generation methods. It not only increases the value of your money but also safeguards the future of your loved ones from unforeseen events.

The investment component of unit linked insurance plans enables investors to place assets in the equities, debt, and balanced asset classes and funds of their choice.

After the plan expire, the policyholder receives the maturity value and can use the funds for a variety of financial objectives.

Also, in the terrible event that the policyholder passes away during the term, the life insurance component of a ULIP provides a death benefit.

In certain circumstances, the nominee is compensated with the full sum insured amount, even if the plan’s investment value is lower.

You can open a plan by visiting your local bank or online brokerage, or by asking your financial advisor.

What is the difference between unit linked insurance plans and regular life insurance policies?

Life insurance is a product that provides financial protection to your family in the event of death. The premium paid by you is invested in an insurance company, which earns returns on the investment and pays out a lump sum amount upon your death.

A policyholder gets an agreed sum upon his or her death, which can be used to meet funeral expenses and other financial commitments like loan repayment and the like.

There are several life insurance choices available to meet a variety of needs and criteria. Depending on the immediate or long-term needs of the person who will be insured, it is vital to consider whether to pick temporary or permanent life insurance.

The majority of clients looking for affordable life insurance coverage discover that term life insurance best meets their wants, despite the fact that term life insurance and permanent life insurance have some significant variances.

On the one hand, term life insurance has a set time limit and offers a death benefit if the policyholder dies before the term is up.

On the other hand, permanent life insurance stays in effect as long as the insured keeps paying the premiums.

Another key difference is to premiums; term life is often much less expensive than permanent life because it does not ask for the creation of a financial value.

Meanwhile, unit linked insurance plans are combination products where life insurance is linked with mutual funds or equities.

When you invest in unit linked insurance plans, you not only get an insurance policy but also earn returns on your invested premiums every year. This makes them better than regular savings accounts and fixed deposits as they help build wealth over time.

No matter which plans you plan on getting, however, there are a number of things you should consider.

Before you apply for life insurance, you should ascertain the amount of money required to maintain the standard of living for your dependents or satisfy the necessity for which you are purchasing a policy.

Also, you should consider how long you will need coverage.

For example, if you are the primary caregiver and your kids are small, you’d need enough insurance to cover your parental duties until the kids are old enough to support themselves.

Consider your spouse’s retirement needs as well as any outstanding mortgages when calculating the cost of your life insurance. especially if the partner works part-time or makes a substantially lower income.

If you can afford it, you can decide to acquire a death benefit by adding up these expenses over the next 16 or so years, adjusting for inflation.

Who are unit linked insurance plans for?

Unit linked insurance plans are suitable for investors who want to save for retirement and also have the discipline to pay premiums regularly for a long period of time.

They are investments if you want to grow your wealth in the market and have insurance protection simultaneously.

As such, if you’re looking to save for retirement or any other long-term goal, a unit linked insurance plan is a great option.

In the past, a unit linked insurance plan has been the favorite investment option for many expats and it is easy to see why. It combines life insurance and mutual funds into one product with attractive tax benefits.

This allows for greater flexibility in building your portfolio, more control over how much risk you take on, and even helps you save for retirement. But is getting a unit linked insurance plan right for you?

Let us take a look at the pros and cons of this type of investment so that you can decide if it is right for your needs!

What are the benefits of unit linked life insurance?

Unit linked insurance plans are a combination of life insurance and investment. It is available in both term and endowment policies, which means that you can choose whether you want your plan to be active for a fixed period (say 10 years), or till death.

In case you are wondering what exactly does the term “unit linked” mean, it simply refers to an arrangement where one unit is paid out as per the terms and conditions mentioned on your policy document.

This arrangement aims to help protect yourself against inflation while offering returns higher than those offered by traditional bank deposits or mutual funds schemes such as SIPs or Systematic Investment Plans.

Unit linked insurance is a unique form of life insurance that provides you with the following benefits:

Tax benefits

Many unit linked insurance plans are treated as an investment and any income earned from this investment can be taxable, but not always. Depending on where you are, you can sometimes claim deductions for premiums paid on the policy.

Check with a trusted tax attorney and your financial advisor to work out the taxes you will have to pay on your offshore savings plan.

Portability of funds

With unit linked insurance plans, there is no need to surrender the plan or annuity prematurely if you want to move on to other investments such as stocks or mutual funds.

You can swap between funds numerous times during the policy term with many of these plan providers. A top-up can also be used to increase the value of your money.

Also, you can charge-free partially withdraw your assets after the lock-in time to meet your financial demands.

You can simply switch from one fund manager’s portfolio into another without having to pay any penalties or exit charges, unlike mutual funds where you’ll have to pay an early redemption fee if you sell within a minimum period after buying it.

Better growth potential than simple savings accounts

The growth potential of unit linked policies depends on how well each fund performs over time.

The ability of equities and debt funds has the potential to produce larger returns. This will assist you in achieving your life’s objectives, including paying for your child’s further education, purchasing a new home, and dream car, or retirement among other things.

Protection and an incentive for developing good financial habits

Unit linked insurance plans offer the security of a life insurance policy, which financially shields your family in the event of an unlucky circumstance.

Many insurers will invest between 70%-80% in equity-based funds while keeping 20%-30% in fixed income instruments like bonds which tend not only provide stable returns but also reduce volatility compared with pure equity investments like stocks.

But you can do this yourself, as these plans give you the option to choose the funds in which you invest your premiums.

The key to effective long-term financial planning is the practice of consistent, disciplined saving, which is what unit linked insurance plans encourage. You can profit from wealth creation for your loved ones by paying premiums on time.

There are plenty of other options if you think you cannot maintain the long contribution periods demanded by unit linked insurance plans
There are plenty of other options if you think you cannot maintain the long contribution periods demanded by unit linked insurance plans. | Photo: Pexels

What are the drawbacks of unit linked insurance plans?

Unit linked insurance plans and expat savings plans are a passive way to earn money for the long-term, but it does have its disadvantages.

One of the biggest disadvantages is if you live in a country where you have to pay taxes on the money you earn through unit linked insurance plans. This will reduce your returns by quite a bit, depending on what tax bracket you are in and how much interest and dividends your investments generate.

You also need to factor in the cost of buying and maintaining this type of policy every year—this can be anywhere between 1-3% of your total investment amount per year depending on factors such as age (the older we get, the higher our premiums tend to go), health conditions or family history if any, etc.

As with all investments, there is also no guarantee whatsoever about how well stock markets will perform during any given period.

So even though many investors find themselves making good returns when investing long term through unit linked insurance plans, there are plenty others who lose out with funds that do not perform as well.

Unit linked insurance plans are also not liquid assets because they tend to lock in your money for longer periods—at least five years if not more—and cannot be cashed out before maturity without incurring penalties or losing some interest earned over time.

Many such products available today have early withdrawal rules that limit flexibility with your finances, which means signing into a unit linked insurance plan is a major commitment that should be considered carefully.

When choosing expat savings plans or unit linked insurance plans, remember that many of them in addition to their regular fee schedule also impose steep penalties for early withdrawals.

The cost of the programs is frequently estimated up front due to sales and administrative costs. A portion of the expense is subsequently reimbursed to the client in bonuses at the end of the plan.

Let us assume the simple case of a person who buys a 10-year savings plan. If the premium is paid over 120 months, the overall cost of the plans is typically between 1% and 2% every year.

That seems sensible. Due to the fact that end-of-contract bonuses are frequently not refunded to clients, the true cost if the client stops paying halfway through the contract is closer to 4% annually.

Depending on the circumstances and limitations associated with your account, you might be able to select a less expensive option or reduce the account’s current pricing structure.

If you’re able to fully commit to an expat savings plan, then congratulations! You are one of the select few for whom these plans are intended.

Yet, in reality, only 3%–4% of people actually pay for the customary 20– to 30-year periods of these policies. The 10- or 15-year plans can, nevertheless, produce decent profits.

Because the initial fee structure is so high, many people quit making contributions to their plans.

Due to their inability to perceive the payoff, which is the sizeable bonus at the end of their contract, many clients commonly stop making payments.

Many people decide to withdraw early because they discover that their needs have changed throughout the contribution period.

There is also the matter of the fee structure on certain unit linked insurance plans, because not all are applied consistently.

In general, our suggestion is that traditional plans should be avoided unless you can make a commitment to paying the monthly contributions because there is just too much opportunity cost.

There are better options out there for saving your money, and even more flexible options offered by modern providers.

In most cases, unit linked insurance plans either lose money annually, break even, or at best, make 4% annually if members stop making contributions.

Due to non-contribution, if the markets are performing at 8%-9%, the client’s account may grow by 4% if the appropriate funds are chosen, despite the fact that the annual cost of the account would be greater than 4%.

In these savings plans, the “indemnity period” is often 18 months. This means that if you stop contributing during the first 18 months, you will lose all you’ve invested.

It is not true that if you stop paying contributions after 18 months, you would lose your whole investment. Conversely, the high costs will reduce the company’s profits.

Given these facts, it is evident that these plans are often not particularly adaptable to an expat’s lifestyle.

This is especially true if you have only invested a little amount of your income. It is reasonable to expect that a foreigner earning $10,000 after taxes will be able to pay a monthly fee between $500 and $1,000. A foreigner living on $3,000 per month may find it challenging to maintain the premium.

After the initial period is over, you can choose to stop contributing, cut, or increase your premium, but each choice has disadvantages. Even with your premium decreased, there is still a chance that you will experience very little gains or losses.

This is because the original premium served as the basis for the billing structure. For instance, the percentage-based payment system will continue to be based on the $2,000 premium even if you reduce your monthly premium from $2,000 to $300.

Provider fees differ, but the following characteristics are included in all expat savings plans:

  • have inflated prices. Although while some years have greater fees than others, typically they are very comparable.
  • If you fail to put money in every time, you will incur astronomically high fees. You will receive a portion of the account fees back if you make monthly deposits into the accounts until they mature. You frequently cannot receive the benefits if you miss even one month.
  • They cost a lot more than other lump-sum alternatives and current savings plans.

At 110 months into a 10-year savings plan, it is obviously more beneficial to make contributions for the remaining 10 months since incentives will cut the account’s average cost.

If you have only been investing for five, ten, or fifteen years, you may want to keep continuing.

Are unit linked insurance plans good investments?

A unit linked insurance plan is a good investment, with caveats.

As mentioned before, this type of policy can help you save for retirement, your children’s education and other long-term goals.

They are a good option for those who want to invest in their future but don’t have the time or expertise to pick stocks or mutual funds on their own.

Unit linked policies are offered by banks and insurers as an alternative to traditional term plans which provide both the benefits of an insurance policy and investment funds.

Alternatively, should you desire more lucrative investment vehicles for your money at similar or higher risks, there are other options such as the following:

Mutual funds

You can invest in a mutual fund of your choice and have it automatically debited from your bank account every month.

Mutual funds pool the capital of its owners to invest in stocks, bonds, money market instruments, and other securities.

Qualified money managers distribute the assets of mutual funds in an effort to generate profits or income for the fund’s investors. The portfolio of a mutual fund is developed and managed in accordance with the prospectus’ stated investment objectives.

Via mutual funds, small or individual investors can access professionally managed portfolios of stocks, bonds, and other instruments.

So, each investor receives a proportional share of the fund’s gains and losses.

Typically, the success of a mutual fund is assessed by changes in its overall market capitalization, which is determined by the performance of its underlying investments. Mutual funds invest in an extensive range of assets.

Larger financial institutions such as Fidelity Investments, Vanguard, T. Rowe Price, and Oppenheimer own the bulk of mutual funds. The manager of a mutual fund, often known as the investment adviser, is required by law to act in the best interests of the shareholders.

This is one of the best investments if you have a lengthy time horizon. However, it might not be suitable if you want quick returns or need liquidity in the near future because these investments take time to mature.

Stocks and exchange traded funds

An investment that represents ownership in a portion of the issuing corporation is referred to as a stock, which is also known as equity.

Shares, commonly referred to as units of stock, give its owners a proportionate share of the company’s assets and earnings based on the number of shares they own.

Stocks, which are typically purchased and sold on stock exchanges, make up the majority of individual investors’ portfolios. Stock trades must adhere to regulations set forth by the government to protect investors from deceptive practices.

Direct stock purchases or mutual funds are additional ways to invest in equities. Similar to mutual funds, exchange traded funds are pooled investments that comprise assets that closely resemble a specific index, such the S&P 500.

ETFs perform very similarly to mutual funds as a pooled investment security. ETFs frequently track a specific industry, index, commodity, or other asset, but unlike mutual funds, they can be purchased or sold on a stock exchange just like regular equities.

An ETF can monitor anything, from the price of a single commodity to a big and diverse group of securities. ETFs may even be designed to follow particular investment strategies like halal ETFs that follow only securities that comply with Sharia law.

Government-run pensions and retirement schemes

Government-run securities such as Public Provident Fund in India or Central Provident Fund in Singapore, or even the State Pension in the United Kingdom are designed for long-term saving.

Often, these funds offer interest rates that are higher than those offered by traditional savings accounts and are created for the social security of their citizens.

In exchange for contributions while they are at working age, these types of funds often promise tax-free income when they reach retirement age, alongside other benefits such as access to housing and education loans.

Check with your local government to see what sort of options you can have as an expat if you plan on working in a particular country for the long term. It is also recommended to consult a trusted tax attorney or financial planner for other suggestions suited to your particular circumstances.

Conclusion

An expat savings plan, unit linked insurance plan, or offshore savings plan are different names for a contract that is a combination of life insurance and investment.

They allow you to make regular premium payments, while also investing in mutual funds or equities to grow your money.

However, it is important to note that these plans are not investments themselves; rather they’re a financial product where you put your money into an insurance policy along with other options such as fixed deposits or bonds.

Unit linked insurance plans have other advantages like incentivizing regular saving habits through high returns on investments and sometimes tax benefits.

However, there are some disadvantages too such as long lock-in or indemnity periods, or the amount of time that your money cannot be withdrawn, and high charges for administrative services provided by the insurer.

In this way, unit linked insurance plans are a good way to save for your future, but they are not the only option.

If you want more flexibility or need more help with your finances, consider other investment products or consult with a trusted financial advisor for suggestions tailored specifically for your circumstances.

Pained by financial indecision? Want to invest with Adam?

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Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.

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Expat savings plans, unit linked insurance plans, offshore pensions: What are the benefits and drawbacks?
Expat savings plans, unit linked insurance plans, offshore pensions: What are the benefits and drawbacks?

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