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SCMP Reporter

Negative equity is a disturbing predicament for many homeowners. Knowing that the apartment they bought is now worth far less than they paid for it is worrying. If it is also worth less than the value of the loan they took out to buy it, sleepless nights are assured. 

The situation may be miserable, but not desperate if the property is actually being lived in. 
Negative equities are also disturbing - no one likes buying stocks and seeing their value shrink. 
More disturbing than each of them is the combination of the two - the purchase of equities or other investments with a loan, and the subsequent fall to less than the value of the outstanding debt. 
There is likely to be little sympathy for punters who borrowed heavily from their bank - on whatever pretext - and then plunged into the markets only to see the value of the shares drop below the value of their borrowings. And rightly so. 
What, though, of those who have been persuaded to take out loans for apparently safe investments, designed to build up a nest egg or provide a comfortable retirement. This is a growing concern to the Securities and Futures Commission (SFC), which has been receiving complaints from investors who have bought investment-linked life assurance schemes (ILAS). 
These schemes are popular among the middle-aged, looking to build capital for retirement. Expatriates are a major target for the salesmen - many of these funds originated in Britain - and Hong Kong locals are also becoming attracted to the schemes. 
An ILAS, or as it is more usually called in Britain, a unit-linked insurance policy, provides a long-term investment in a fund linked to an insurance policy. The initial lump sum, plus regular monthly premiums are partly invested in units of a managed fund, either by the issuing company or by an independent fund manager. The remainder goes to provide standard life-insurance cover. 
Should the grim reaper strike, the beneficiaries receive the insurance portion plus the accumulated profits of units. In the happy event that the policy matures, then the holder receives a lump sum, plus the accumulated savings from the fund. 
Or minus the losses of the fund. And there is the rub. For as with virtually every other investment product which involves equities, unit-linked insurance schemes have not been doing well. 
Figures published recently in Britain showed that the average value of GBP12,000 (about HK$145,000) invested in a unit-linked policy after 10 years was just GBP13,434. The highest sum was GBP15,327, and the worst, GBP11,186. 
As many of the funds sold here are British products the figures will be identical. Closer to home, figures compiled by Standard & Poor's Fund Services for similar products sold in Singapore also make sad reading. 
Let us assume that a sensible investor has diversified by going for a global fund instead of linking his or her future to a specific market place or asset class. Over five years, only two out of six policies linked to global equities made any money, and even the best only managed a paltry 8 per cent. Over three years, nine out of nine lost money, the biggest loss racked up was 50 per cent. 
These sort of performances are bad enough, but for the unfortunate investors who invested in these products by borrowing, the additional finance charges have made this a costly exercise indeed. As these are long-term products, it is likely that the loans taken out to buy them will also have been long term, and when the policy matures, the initial capital will have to be paid off - which could well leave the policy holder with only a fraction of the expected sum. The assets will also belong to the bank until the loan is paid off, and on top of interest rates there will be handling charges, and maybe even redemption costs if a long-term loan is paid off prematurely. 
Why should anyone borrow to buy life insurance? Because these are really thinly disguised investments. Tacking on some life insurance changes their status, but they are still sold in much the same way as normal unit trusts or mutual funds. 
Except for one important difference - while the underlying products are authorised by the SFC, the vendors of these products do not have to be registered with the commission. They come under the rules of those who watch over the insurance industry. This, say some, means that standards may not be quite so high. 
It is possible that some sales staff actually think more about the commission than they do about the needs of the potential policy-holder. It is in their interests to persuade clients to buy the maximum amount of unit-linked insurance - and if that means borrowing, so be it. 
When explaining the policies, the sales staff should point out crucial facts, especially the penalties for cashing in early. The charges made by insurance companies are taken off during the early years of a policy, so the amount actually paid back in the event of early redemption can be pitifully small. 
Anyone under pressure to buy a unit-linked policy, particularly by borrowing to increase the amount invested, should consult a reputable financial adviser, and remember that there is a 14-day cooling off period after signing up in which to change their mind. 



Take a cool approach to investment-linked insurance products