In life insurance, unit-linked funds (unites de compte) refer to all investment vehicles other than the euro fund. Equities, bonds, real estate through SCPI and OPCI, commodities, private equity: all these asset classes are accessible through unit-linked funds. Unlike the euro fund whose capital is guaranteed by the insurer through a profit-sharing reserve mechanism, the value of unit-linked funds fluctuates up and down with financial markets. The insurer guarantees the number of units held, but not their value.
This distinction is fundamental and often misunderstood by savers. When you invest 10 000 euros in an MSCI World ETF through your life insurance, you buy a certain number of units (for example 50 units at 200 euros each). If global equity markets fall by 20%, your 50 units are worth only 160 euros each, totalling 8 000 euros. You have lost 2 000 euros in value, even though you still hold the same number of units. This loss only becomes permanent if you sell (switch) your units at that point. If you hold them and the market recovers, your capital can return to its initial level and surpass it.
Understanding the different types of risks, knowing how to quantify them through regulatory indicators, and implementing protective strategies are essential for investing confidently in unit-linked funds.
The different types of risks in unit-linked funds
Market risk: the most visible and most significant
Market risk corresponds to the general decline in financial asset prices, driven by macroeconomic factors (recession, inflation, rising interest rates), geopolitical events (wars, diplomatic crises) or systemic factors (financial crisis, pandemic). This risk is called "systemic" because it affects all investments within the same asset class, including the most diversified portfolios.
Historical reminder of major declines:
- 2008 financial crisis: global equity markets lost 40 to 55% of their value in 18 months, the MSCI World falling from 1 700 to 690 points
- Covid crash of March 2020: a 33% drop in the MSCI World in just three weeks, the fastest decline in market history
- 2022: a simultaneous decline in equities (-13% for the MSCI World) and bonds (-15% for European sovereign bonds), a rare phenomenon that penalised even the most diversified portfolios
The lesson from these crises is twofold: declines can be brutal and dramatic, but markets have always recovered. The MSCI World returned to its pre-2008 crisis levels in about 5 years, pre-Covid levels in 5 months, and pre-2022 levels in 12 months. Patience is the best protection against market risk.
Currency risk
When you invest in funds denominated in euros but containing assets in foreign currencies (US dollar, Japanese yen, British pound), you are exposed to exchange rate fluctuations. An MSCI World ETF, for example, is invested approximately 65% in US dollars. If the dollar falls 10% against the euro, the ETF's performance in euros will be reduced accordingly, even if the underlying stocks remained stable in dollar terms.
In 2024, the relative weakness of the euro against the dollar was a positive factor for European investors in American equities, adding approximately 2% of additional performance from the currency effect. The reverse occurred in 2017 when the euro's rise against the dollar cost approximately 12% of performance on American equity ETFs held by European investors.
"Hedged" ETFs exist to neutralise this risk, but the hedge has a cost (0.2 to 0.5% extra per year) and also eliminates potential gains from favourable currency movements. Over the long term, currency movements tend to offset each other.
Liquidity risk
Some unit-linked funds invest in illiquid assets: SCPI (Societe Civile de Placement Immobilier), OPCI, private equity funds (FCPR), real estate funds. In times of crisis or massive redemption requests, selling these underlying assets may be delayed or executed at a price below their estimated value.
In life insurance, this risk is partially mitigated by the insurer who provides redemption liquidity through its reserves. However, exceptional delays can occur, as was the case for some SCPI in 2023-2024, when redemption requests exceeded the liquidity capacity of certain funds, leading to temporary blocks or discounts on redemption prices.
Credit risk
Bond funds are exposed to issuer default risk. If a company or government can no longer honour its debt commitments, the value of bonds held in the fund drops sharply, or even falls to zero. This risk is tiered:
- Sovereign bonds from developed countries (France, Germany): very low risk
- Investment grade corporate bonds (BBB- rating and above): moderate risk
- High yield bonds: high risk, historical default rate of 3 to 5% per year
- Emerging market bonds: variable risk depending on the country
Concentration risk
Investing all your unit-linked funds in a single sector (technology, energy, healthcare), a single geographic zone (United States) or a single fund exposes you to potentially devastating concentration risk. If that sector, zone or fund suffers a specific crisis, losses can be far greater than those of a diversified portfolio.
Worked example: Hugo and concentration risk
Hugo, 29, an aeronautical engineer at Airbus in Toulouse, opened his life insurance 3 years ago with 15 000 euros invested 100% in a Nasdaq-100 ETF, fascinated by the spectacular tech performance. In 2024, his bet worked brilliantly with a +28% return. But in 2022, he had suffered a -33% drop (i.e. -5 000 euros of unrealised loss), far worse than the -13% of the diversified MSCI World. After a discussion with a wealth management advisor, Hugo restructured his allocation:
- 50% Amundi MSCI World ETF (global diversification, 1 500 companies)
- 20% iShares Core MSCI World ETF (diversified complement, accumulating)
- 15% euro fund (security, portfolio stabiliser)
- 10% European bond ETF (decorrelation)
- 5% SCPI Iroko Zen (real estate, regular income)
This diversified allocation would have limited the 2022 decline to approximately -9% instead of -33%, while capturing about 70% of the upside in favourable years. Over 20 years, the risk-adjusted return would be superior thanks to reduced volatility and the rebalancing effect.
The SRI risk scale: an essential regulatory indicator
Each unit-linked fund is classified on a risk scale from 1 to 7 called SRI (Summary Risk Indicator), which replaced the former SRRI under the European PRIIPs regulation. The higher the number, the greater the risk and return potential.
| SRI Level | Annual volatility | Types of funds |
|---|---|---|
| 1 (very low risk) | < 0.5 % | Money market funds, savings accounts |
| 2 (low risk) | 0.5-2 % | Short-term bonds, dynamic euro funds |
| 3 (low-moderate risk) | 2-5 % | Diversified bonds, conservative funds |
| 4 (moderate risk) | 5-10 % | Balanced mixed funds, SCPI |
| 5 (moderate-high risk) | 10-15 % | Diversified equity funds (Amundi MSCI World ETF) |
| 6 (high risk) | 15-25 % | Sector equity funds, small caps |
| 7 (very high risk) | > 25 % | Emerging equity funds, commodities, PE |
Before investing in a unit-linked fund, systematically consult its Key Information Document (KID), a 3-page regulatory document that indicates the SRI risk level, four simulated performance scenarios (unfavourable, moderate, favourable and stress) and detailed fees. The KID is freely available on the asset management company's website and in your life insurance online dashboard.
Strategies for managing unit-linked fund risks
Diversification: the golden rule of portfolio management
Diversification remains the best protection against risk, and the only one that is free. Spreading your capital across multiple asset classes (equities, bonds, real estate, euro funds), geographic zones (Europe, North America, Asia, emerging markets) and business sectors (technology, healthcare, industry, finance) significantly reduces the overall volatility of the portfolio without sacrificing expected returns.
Modern portfolio theory, developed by Harry Markowitz and awarded the Nobel Prize in Economics, mathematically demonstrates that a diversified portfolio offers a better risk/return ratio than a concentrated portfolio. In practice, most of the diversification benefit is achieved with 5 to 8 well-chosen investment lines; beyond that, the marginal diversification gain diminishes sharply.
Progressive investing (DCA)
Rather than investing a large sum all at once, the progressive investing strategy (or DCA, Dollar Cost Averaging) involves spreading contributions over time. By investing a fixed amount each month, you buy more units when prices are low and fewer when they are high, smoothing the average purchase price and reducing timing risk.
Managed portfolio services from Yomoni, Nalo and Ramify encourage this approach by offering scheduled monthly contributions starting from 50 to 100 euros per month. Academic studies show that DCA reduces portfolio volatility by approximately 20 to 30% compared to a lump-sum investment, at the cost of slightly lower performance in a rising market (in approximately two-thirds of cases, investing immediately gives a better result, since markets rise more often than they fall).
Progressive gain-locking
As you approach your financial goal (retirement, property purchase, funding education), progressively transfer your unit-linked funds to the euro fund. This risk de-escalation strategy (or "glide path") can be automated through the automatic management options available on most online contracts, or through Nalo's progressive securitisation which automatically adjusts the profile based on the number of years remaining before the client-defined goal.
Automatic management options: a free safety net
Modern contracts offer automatic protection mechanisms, generally free and without switching fees:
- Stop-loss: automatic switch to the euro fund if a unit-linked fund loses more than a defined threshold (for example -10%). Available on Linxea Avenir 2, Linxea Spirit 2, Lucya Cardif
- Gain-locking: automatic transfer of gains to the euro fund above a threshold (for example +15%). Limits the risk of giving back already-achieved gains to the market
- Automatic rebalancing: return to the target allocation at regular intervals (quarterly, semi-annually). Enforces the discipline of "buy low, sell high"
These options do not replace an overall allocation strategy, but they protect against the two most costly mistakes: not taking profits and not cutting losses.
The imperative of maintaining emergency savings
Never invest in unit-linked funds money you might need in the short term. Maintain emergency savings equivalent to 3 to 6 months of expenses in a Livret A (yielding 2.4% in 2026) or LDDS before exposing yourself to financial markets. This safety reserve will allow you to deal with an emergency (job loss, urgent repair, health problem) without having to liquidate your unit-linked funds in unfavourable market conditions.
Aligning horizon and risk
Time is the best ally of the unit-linked fund investor. The longer the horizon, the higher the probability of gains and the lower the probability of losses. Historical studies on the MSCI World show that:
- Over 1 year: probability of loss of 27%
- Over 5 years: probability of loss of 12%
- Over 10 years: probability of loss of 3%
- Over 15 years: probability of loss of 0% (since 1970)
This finding implies a simple rule: only invest in equity-dominated unit-linked funds money that you will not need for at least 5 years, ideally 8 to 10 years. The shorter your horizon, the higher the share of euro funds and bonds should be in your allocation.
The most common mistakes savers make with unit-linked funds
Panicking during a decline and selling at the worst moment. The investor who sold their unit-linked funds in March 2020 turned a temporary unrealised loss of -33% into a permanent loss, missing the spectacular recovery in the following months (+50% between April and December 2020). Panic is the number one enemy of the saver.
Ignoring your investment horizon. Investing in equity unit-linked funds over a short horizon (less than 3 years) is an inappropriate risk. Markets need time to absorb shocks and generate performance. If you need your money in 2 years, stick with the euro fund and short-term bonds.
Concentrating investments in a single asset. Betting on a single fund, a single sector or a single country is excessive and unnecessary risk-taking. Diversification is free and divides risk without reducing expected returns.
Neglecting fees. High fees erode returns without reducing risk. Over 20 years, 1% of additional fees per year reduces the final capital by 18%. Favour ETFs (Amundi MSCI World ETF, iShares Core MSCI World, Lyxor PEA Monde) and contracts with moderate fees.
Confusing unrealised losses with actual losses. As long as you do not sell your units, the decline is only a "paper loss". Only a switch or withdrawal turns an unrealised loss into a real and permanent loss. This psychological distinction is essential for keeping a cool head.
The most costly mistake: market timing
Attempting to "time" the market -- that is, selling before declines and buying back before rises -- is a strategy that seems intuitive but fails in the vast majority of cases. According to a JP Morgan study, an investor who missed the 10 best trading days on the S&P 500 over the last 20 years (2004-2024) saw their annualised return drop from 9.8% to 5.6%. Missing the 20 best days brought this return down to 3.1%. Yet these best days often occur just after the worst ones, at the moment when most panicked investors have already sold.
Conclusion: risk is the price of performance, but it can be managed
Investing in unit-linked funds means accepting capital fluctuations that can sometimes be impressive. This risk is the price to pay for achieving a return above the euro fund over the long term: historically, global equities have returned 7 to 9% per year on average, compared to 2 to 3% for the euro fund. By diversifying your portfolio, investing progressively, adapting your allocation to your horizon and using automatic protection options, you can manage this risk without trying to eliminate it. The essential thing is never to invest more than you are prepared to see temporarily fluctuate, and to keep in mind that time is your best ally.
Disclaimer
The information presented in this article is provided for informational and educational purposes only. It does not constitute personalised investment advice in any way. Past performance is not indicative of future results. Any investment carries a risk of capital loss on unit-linked funds. Before making any investment decision, we recommend consulting a qualified wealth management advisor.