Have you been wondering what money as a unit of account actually means? In this article, we are going to explain what money is and the concept “unit of account”.
Money has various definitions and we are going to take a glimpse of some of the notable definitions:
Commodity Money: Items that are used as money and that also have intrinsic value for another use. The advantage of merchandise money is that its value as money is immediately known, which offers a guarantee of value.
Convertible Paper Currency: Title that circulates as means of payment and that can be convertible usually by gold or silver.
Fiduciary Money: It is an intrinsic commodity without value (or almost no value), which performs the functions of money. It is the most developed institutional, social and economic expression of value, which expresses itself in its form of money.
The money I will Pay: Loan that the borrower promises to repay at sight with notes and coins in circulation. By transferring the right of reimbursement from one person to another, that loan can be used as money.
Means of Payment or Exchange: When you go to a store and buy a pair of shoes, the store clerk gives you the shoes you have chosen and you give them the money they cost. This is the primary function of money, facilitating exchange because it is a conventional good of general acceptance and guaranteed by the state.
Value Deposit: The exchange is divided into two parts: On the one hand, individuals carry out sales operations (they exchange goods and services for money), on the other, they carry out purchase operations (money for services or merchandise). This implies a disaggregation of the change not only material but also temporary. That is, the individual who has obtained money has a purchasing power that can materialize at the time it deems appropriate in the future.
Unit of Account or Exchange: Money expresses in certain units the values (prices) that things already possess, thus making economic calculations easier.
A pattern of Deferred Payments: When people enter into contracts that require future payments, they specify that they will be made in monetary terms. The debts are expressed in terms of money.
Although it is stated that money has the basic functions already described, from an empirical as well as a theoretical point of view, one or even two of these functions have been considered more important, and what is considered money rarely fulfills all three functions.
For example, based on the statistical measures of money, a restricted monetary aggregate such as M1 broadly fulfills the function of means of exchange (and medium of payment) but constitutes a mediocre wealth reserve (since it reports little or no interest). A broader aggregate, such as M2 minus M1, may constitute a good wealth reserve but is not in itself a means of exchange (or a means of payment.) The larger aggregate M2 is a set of different forms of deposits, some of which they fulfill the function of means of exchange while others fulfill the function of wealth reserve.
The global inability of money to fulfill the three functions also appears in the theoretical models in which a variable called money is assumed certain properties. For example, the money demand model for transactions treats money as a means of exchange and not as a reserve of wealth. Alternatively, the demand for money in the portfolio approach puts the accent on money as a wealth reserve characterized by a fixed nominal price.
Now, let us see what a unit of an account or account unit really means, and how money can perform this function.
The definition of a Unit of Account is based on that of UCITS (Undertakings for Collective Investment in Transferable Securities). Thus, when an investor wants to invest in the financial markets, he can do it in two ways:
It is also possible to subscribe to these UCITS through a life insurance policy. In this case, they then take the name of Units of Account.
Note: except for very specific contracts, conventional life insurance policies do not allow investing directly in stocks or bonds.
Investing in Units of Account makes it possible to place your savings on financial supports more dynamic than the fiat. In return for a risk of loss, more or less depending on the nature of the Units of Account, we hope to benefit from a higher return.
The Unit- thus allowing investment including the equity markets by taking a measured risk and very low amounts. Most life insurance contracts make payments of around $100, whereas many shares have values well above this amount.
Thanks to the Units of Account, you can effectively diversify your savings and reduce the risk of loss. This risk is lower by investing in a Unit of Account that owns shares in about 50 companies, for example, rather than in a single company. In the Unit of Account, the increases in one compensate for the losses of the others.
Contrary to popular belief, Units of Account are not necessarily all 100% equities. An immense diversity reigns among the hundreds of Units of Account available on different countries life insurance contracts. Some contracts refer to more than 800!
Units of Account can be invested in equities, but also in bonds, or in monetary instruments for risk-free short-term investments. Many of them also associate these assets, to form so-called "mixed" funds, whose composition varies according to the markets. It will be more oriented towards equities when equity markets are up, and vice versa.
Faced with such a wide choice, life insurance professionals have several tools. To offer their clients asset allocation - that is to say, allocations to different Units of Account - adapted to their needs, they measure using simple questionnaires:
This analysis helps to define an investment framework and gives the investor a good view of the content of his contract. It is a legal obligation for any life insurance broker.Share on Twitter Share on Facebook Share on LinkedIn