In recent years, many Italian savers have found themselves faced with investment offers presented as “advanced insurance solutions.” These are often products that combine insurance and returns, known as “linked” policies. These hybrid forms, which combine life coverage with participation in financial markets, promise tax advantages and opportunities for capital growth.
However, beneath a reassuring surface, high costs, complex structures and lower-than-expected returns sometimes hide . This article aims to shed light on how unit and index-linked policies work, comparing them with traditional mutual funds.
I am not a financial advisor:
The information provided does not constitute a solicitation for the placement of personal savings. The use of the data and information contained as support for personal investment operations is at the complete risk of the reader.
Investment policies are insurance contracts that include a financial component. In other words, the capital paid by the insured is not simply set aside to cover future events (as happens in traditional insurance), but is invested in financial markets. This makes these instruments potentially more profitable but also riskier.
Among investment policies, the most widespread are the so-called “linked” ones: they are mainly divided into two categories:
Unit-linked
Index-linked
Both are among the most flexible and sophisticated forms of insurance investment, but for this very reason they can be difficult to understand for the average customer. The basic idea is to combine the protection of a life insurance policy with the return deriving from financial instruments, such as mutual funds, stock indexes or derivative products.
Unlike traditional policies with guaranteed capital, linked policies do not guarantee a minimum return. The value of the investment can increase or decrease, and the insured assumes part of the risk. In exchange, they offer tax benefits, the ability to designate specific beneficiaries in the event of death, and in some cases capital protection features. However, not all of these advantages are always present, and it is essential to understand each individual contract in detail.
#2. Linked: definition and operation
Linked policies are defined as such because they are “linked” to financial instruments. In this case, insurance becomes an investment vehicle. There are mainly two types of linked policies: unit linked, linked to internal or external funds, and index linked, linked to indices or baskets.
Unit-linked policies require that the premium paid is used to purchase shares of mutual funds, selected by the insured or the manager. The value of the policy therefore depends on the performance of these funds. They are considered more flexible and offer a greater variety of choice, but often include hidden costs: entry charges, annual management fees, performance fees, redemption costs and charges related to the insurance part.
Index-linked policies, on the other hand, are tied to the performance of a financial index (such as the Eurostoxx 50 or the S&P 500) or to a combination of financial instruments. The structure is more rigid: the client does not choose the securities directly, but participates in a predefined strategy. These policies often include capital protection mechanisms at maturity, obtained through derivatives. However, they also present a counterparty risk, because the outcome of the investment depends on the solidity of the issuer that structures the financial component.
Both types are complex instruments, where tax and inheritance benefits are often put at the forefront of the sale, while costs and risks are relegated to the more technical clauses.
#3. Differences with mutual funds
The comparison between linked policies and mutual funds is essential to understand which may be the most suitable choice based on the investor’s objectives. Mutual funds are pure financial instruments: the saver buys shares of a portfolio managed by professionals and participates in the results (positive or negative) of the fund.
The first obvious difference concerns transparency. Mutual funds, especially harmonized ones, are subject to more stringent information requirements: costs, portfolio composition and past performance must be published regularly. Linked policies, on the other hand, often offer more generic reports and costs are less evident, especially insurance costs.
Another crucial point is liquidity: funds are generally redeemable in a few days, while policies have time constraints or penalties in the event of early exit. This can limit the customer’s flexibility in case of need.
From a tax perspective, policies have some advantages: they are exempt from inheritance tax and are unseizable under certain conditions. However, mutual funds offer preferential taxation only when capital gains are realized, and in some cases it can be more efficient.
Finally, costs: passive funds (such as ETPs) have annual commissions even lower than 0.30%, while many unit-linked policies exceed 2% per year, not counting other charges. This differential, in the long term, has a significant impact on net returns.
#4. Pros and cons of the linked
Linked policies offer a series of advantages that justify, at least in part, their commercial success. The first is of a succession nature: it is possible to indicate one or more beneficiaries who will receive the capital in the event of death, outside the inheritance and without taxes. Furthermore, the policy can be unseizable and unseizable, a useful feature in the case of delicate financial situations.
From a tax perspective, the policies do not generate taxable income until surrender or death. This allows for a sort of “indefinite deferral” of the tax, useful for those who want to manage the tax burden strategically. In addition, in the event of death, the returns are often subject to reduced or zero taxation.
However, there are many cons. The main one concerns costs: high management fees, entry and exit fees, insurance charges and implicit costs drastically reduce the return. Secondly, the lack of transparency can lead to underestimating the real risks. In many policies, the customer does not have direct access to detailed information on the instruments in the portfolio.
Flexibility is also limited: many policies require minimum periods of permanence, and in the event of early exit they can apply significant penalties. Furthermore, customization is often only apparent: in practice, choices are limited to a catalog of options internal to the insurance company or bank.
Finally, it is important to remember that, in the event of bankruptcy of the company or the entity managing the financial part, the capital may not be protected, especially for index-linked products that include structured derivatives.
#5. Why banks offer them
A frequent question among savers is: why do banks push linked policies so insistently? The answer is simple: high margins. Compared to traditional mutual funds or deposit accounts, linked policies guarantee the institution a higher remuneration. The commissions that banks collect can exceed 3-4% just at the entrance, plus a constant annual fee.
Furthermore, these instruments tie the customer more: once a policy is subscribed, it is more difficult and expensive to exit, which means capital “blocked” in the long term. This guarantees the bank a more stable and predictable revenue base over time.
Another reason is low comparability: while an ETF can be easily compared to another in terms of costs and returns, linked policies are more opaque and complex. This makes it more difficult for the customer to understand whether he is getting a good deal or not.
Finally, the commercial aspect must be considered. Many consultants work with remuneration objectives and incentives linked to the placement of certain products. Linked policies, thanks to their structure, are often at the center of the most aggressive sales campaigns.
#6. When it makes sense to subscribe
Despite the critical issues, there are situations in which linked policies can make sense. For example, for those with a high net worth and who want to plan an orderly succession, with tax advantages, the policies can be useful tools. Even those who want to completely delegate the management of their capital, accepting higher costs in exchange for convenience and protection, could find benefits.
Another situation in which they can be useful is that of subjects at financial risk (e.g. entrepreneurs), who want to protect a part of their assets from possible enforcement actions. In these cases, the non-seizable nature of the policy can represent a real advantage.
However, for the average saver, who is attentive to costs and has a basic knowledge of the markets, linked policies are often less convenient than index funds, ETFs or more transparent asset management. Even those who are looking for flexibility and direct control of their portfolio should look elsewhere.
Also know that any financial product present in a securities deposit can be passed down by inheritance to spouses and relatives in direct line without any tax up to a value of 1 million euros per beneficiary. A 4% tax is applied only for the excess amount, which makes the policies for most people just a waste of money.
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