Unit-linked and hybrid insurance policies: what to check before you sign

What we're talking about

Investment life policies are insurance contracts whose value depends, wholly or partly, on the performance of financial investments. There are three common forms in Italy:

• Class I (gestioni separate): your money goes into a segregated fund run by the insurer, mostly bonds. It often offers a capital guarantee, sometimes only under certain conditions (at maturity or on death), and returns are locked in each year.
• Class III (unit-linked): the value is linked to internal or external funds, including equity funds. No guarantee: the risk is yours, as with a mutual fund.
• Hybrid (multiramo): a mix of the two, with part in the segregated fund and part in funds.

The real advantages

• Tax deferral: gains are taxed (26%, or 12.5% on the government bond share) only when you cash in. Switching between funds inside the policy doesn't trigger tax.
• Estate planning: on death, the money goes to the named beneficiaries, outside the estate and free of inheritance tax.
• Stamp duty: class I segregated funds are exempt; unit-linked policies pay it, but only on surrender.
• Asset protection: Italian law protects sums owed by the insurer from creditors. But careful: for policies with only a token insurance element, the courts tend not to recognise this protection.

The weak points

• Two layers of costs: you pay the insurance contract's costs and, on top, those of the underlying funds. Together they easily push total costs above 2% a year. In segregated funds the cost is often a deduction from the return, hard to see but very real.
• Loading charges: a percentage taken from every payment before anything is invested.
• Surrender penalties: getting out in the early years costs money, often with penalties that decline until the third to fifth year.
• Guarantees narrower than they look: a capital guarantee "at maturity" or "on death" doesn't protect you if you cash in earlier. And a nominal guarantee doesn't protect against inflation.

For a long-term investment, the effect of costs is the same as in the guide on fund fees: one extra percentage point a year, over twenty years, is worth tens of thousands of euros.

The checklist before you sign

1. Read the KID: its cost section shows the annual cost impact and the effect on returns over different time horizons. Ask for the KID of each individual investment option too.
2. Add up every layer of cost: loading charges, contract management fees, fund costs and any performance fees. Ask for the total in euros per year.
3. Ask for the penalty table: how much you lose if you cash in after 1, 2, 3 or 5 years.
4. Read the guarantee terms: when it applies, on what amount and whether it's net of costs.
5. Ask yourself whether you really need the insurance part: if the goal is estate planning or protecting someone close to you, a policy can make sense. If the goal is just investing, compare it with simpler, cheaper alternatives.
6. Ask how the person selling it gets paid. Distribution commissions on policies are often substantial. I cover this in the guide on the fee-only model.

If you already have one

Don't cash it in on impulse. First check remaining penalties, tax on accrued gains, any guarantees you'd lose and the policy's role in your estate. Sometimes it's worth keeping, sometimes worth stopping payments, sometimes worth getting out. It's an assessment made with the contract in hand, and part of a portfolio review.