What is a Unit-Linked product?

 

They are attracting investor interest in Portugal, and for good reason. Find out what a unit-linked product is and what to look out for when subscribing to this product.

There is a huge range of unit-linked products on the market, offering diversification and flexibility in investment and redemption. Find out what they are and how they work.

What is a unit-linked product?

Unit-Linked products are a flexible and attractive option for those interested in long-term capital accumulation through a combination of investment and life insurance. These hybrid products allow investors to personalise their investment strategy by allowing them to allocate funds across a range of assets including equities, bonds and alternative investments. This gives them the freedom to adjust their portfolio as their risk profile and financial goals change over time.

The most important feature of unit-linked products is the integration of the life insurance component with the investment in a fund. This structure not only allows for the accumulation of savings, but also provides additional protection for beneficiaries in the event of the death of the policyholder. This combination of protection and the potential for investment growth can be particularly beneficial for those seeking a more comprehensive approach to managing their assets over the long term.

Another feature of unit-linked products is that they offer significant tax benefits when redeemed. Under current legislation, a significant proportion of the income can be exempt from tax after investment periods of 5 or 8 years, making them an attractive choice for those planning long-term investments.

Unit-linked products are therefore ideal for investors looking for flexibility and personalisation, with the added benefit of including a life insurance component and the possibility of tax benefits.

What are the benefits of unit-linked products?

Unit-linked products are popular for several reasons. The main ones are:

Tax benefits

Unit-linked products combine the tax advantages of life insurance with the profitability and liquidity of investment funds. They are taxed differently depending on the duration of the investment, with a special regime for those investing for 5 years or more.

Investment flexibility

You can choose from a range of investment options, depending on your risk tolerance and financial objectives. This allows you to better tailor your investment strategy. The underlying assets, such as equities,bonds or commodities, can be varied according to your investment strategy.

Transparency

The performance of the investments underlying unit-linked products is disclosed by the management companies, allowing policyholders to monitor the performance of their investments.

Early redemption

Unit-linked products allow for early redemption, which means that investors can, under certain conditions, withdraw all or part of the amount invested before the end of the contract.

Upside potential

This is perhaps the main advantage of unit-linked products: the value of the policy is linked to the performance of the investments, allowing policyholders to benefit from potential gains in the financial markets.

What are the risks of unit-linked products?

Although unit-linked products can be advantageous, there are some risks that need to be considered before deciding to invest.

Market risk

The value of investments in unit-linked products is directly linked to the performance of the underlying assets. This exposes investors to market risk and the value of the investment may fluctuate with economic conditions.

Lack of active control

Some investors prefer to be able to actively select and adjust their portfolios, giving them more control over their investments. With unit-linked products, which are managed by the company, the investor can play a less active role in investment decisions.

Complexity

The structure and terms of unit-linked products can be complex. Understanding all the features, investment options and contractual terms can be challenging for some investors, especially those with less experience.

Possible redemption restrictions

Some unit-linked contracts may impose restrictions on early redemption or penalties for redemption before maturity. As a result, investors’ liquidity may be restricted.

How to choose the best unit-linked products?

Choosing the best unit-linked products requires a careful assessment of various factors, taking into account financial needs, investment objectives and risk tolerance. These are the main factors to consider:

1. Define your risk profile

Assess your risk tolerance. Unit-linked products offer a range of investment options, from conservative to more aggressive profiles. Choose an option that matches your ability to withstand fluctuations in the value of the investment.

2. Check performance history

Past performance is no guarantee of future results, but it can give an indication of the consistency and effectiveness of the management of available funds. Review the behaviour of the unit-linked product in different periods, including periods when the market has risen, fallen or been more stable. It is particularly important to assess how the instrument has responded to adverse conditions to understand its resilience in periods of greater volatility and whether you are comfortable with this behaviour.

3. Check redemption flexibility

Some unit-linked products may have grace periods during which redemption is discouraged or subject to financial penalties. Check the contractual information to see if there are specific periods for withdrawing capital. It is also important to check if there is a limit on how much you can withdraw and what the redemption policy is.

4. Diversify your assets

As asset diversification is one of the main benefits of unit-linked investments, you should take advantage of this opportunity and carefully review your investment policy to determine which asset classes and sectors you wish to invest in.

5. Seek professional advice

It is important to seek professional advice, especially if you have any doubts about how unit-linked investments work. Professionals are essential for creating a personalised investment strategy based on your individual circumstances, and can help even at the earliest stages, such as defining your risk profile.

Banco Carregosa, specialist advice on choosing unit-linked products

You can count on Banco Carregosa's team of experts to help you make the best financial decisions. We can help you define your goals and risk tolerance, and select the most appropriate investments for your situation. Contact us and start building the retirement you have always wanted by investing in unit-linked products today.