For some people, buying an insurance policy is still seen as a loss. Because, if there is no risk, the money to be earned is considered not in accordance with the premium paid. That is what later gave birth to unit linked (UL) products that allow customers to get insurance protection, and provide a large cash value from the policies they bought.
Since it was developed since about 10 years ago, this product has developed very rapidly. At present there are around 19 local life insurance companies and joint ventures that sell UL. This product is in demand because in addition to providing protection, it also promises investment returns like savings which value exceeds deposits.
Issues that later arose, the collapse of the capital market due to subprime mortage cases since the end of 2007. World stock markets were immediately corrected sharply, including the capital market in Indonesia which reached its biggest fall in 2008. This condition also jolted equity-based UL customers. The cash value of the policy has been cut by more than 50%. This phenomenon makes some allergic people buy UL and start switching back to traditional products (non UL), which are considered to provide investment value certainty (in the form of cash value).
Not long ago this phenomenon took place, the public was again shocked by the news media that highlighted the case of Bakrie Life which failed to fulfill its promise of endowment products sold. While on the other hand, the skyrocketing of the Indonesian Stock Exchange JCI during 2009 again aroused public interest in the UL.
Of course the incident then raises the question: what type of insurance is safe and profitable? How to study and address this phenomenon?
Traditional products can take the form of whole life, endowment and term insurance. In this product, the amount and duration of premium payments, the type and amount of coverage, the period of coverage and the amount of life benefits (cash and coupon value) have been agreed and guaranteed by the company. Insurance benefits are bundled. With features like this, will the customer be free from the risk of loss? Not necessarily.
The company designs traditional products assuming the growth rate of certain funds.
Customer premiums are invested to achieve this level of profit. If the profit realization is higher than the projection, it becomes the company's profit. Conversely, if the investment returns are lower than projected, the company will bear losses. If this loss is so large, the company can fail to fulfill its promise or even go bankrupt.
As a result, customers also bear the risk of potential losses, due to uncertainty in investment returns. In fact, if the investment is deposited in deposits, the company will still not be able to determine exactly how much interest will be earned throughout the policy contract, because the bank will not be able to promise interest for the next 10 or 20 years. As a result, in anticipation, the company will use the assumption of lower fund growth. If the deposit interest projection is 8%, the calculation of the cash value of the policy will be based on lower growth, for example only 5%.
From this explanation, it can be concluded, even though traditional products are guaranteed by the company, customers are not necessarily free from risk.
What about UL? UL products do not promise certain benefits. The benefits that customers enjoy depend on the market conditions of the selected investment fund. Benefits are more optimal and can be compared to similar investments. However, the investment risk is borne by the customer. The company is only a fund manager, which is sometimes left to other fund managers. For this reason, customers pay a fee in the form of a percentage depending on the type of investment fund.
Besides that, UL is very flexible and unbunled. Customers are free to mix types and amount of coverage, long premium payments, change the type of investment (switching and redirection), change the type and amount of coverage, premium leave, increase investment funds (top up), even withdrawals can be made at any time. These features are not possessed by Traditional Insurance (AT) which tends to be rigid. But with all these features, UL is more complex than AT.
Agencies also need to evaluate and communicate investment performance, whether on track with illustrations. For this reason, adequate knowledge of insurance and investment is very supportive of the UL selling agent profession.
Starting in 2010, the Indonesian Life Insurance Association (AAJI) applied certification tests for prospective insurance agents before selling policies. Which one is better? Depending on the purpose and condition of the customer. If you want to be certain even though it may not be optimal, choose AT. But if it is more concerned with flexibility and profit optimization, UL is more suitable.
Customers who are disciplined in saving or investing and understand investment instruments, especially in the capital market, require less UL investment features. Conversely, those who do not understand about investing in the capital market, can use UL to invest.
Another thing to note, the difference between AT and UL is not related to insurance costs and policy service fees. It is not true to say that insurance costs or UL policy service fees are more expensive than AT, or vice versa. Insurance costs are determined by the potential risk of the prospective insured, which is influenced by age, type of work, lifestyle, type and duration of coverage. While the cost of policy services will be determined by the type and quality of service and the level of efficiency of the company. Because it operates in the same industry and market, the cost structure between companies is relatively the same. Comparison must be done apple to apple.
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