In the conventional bonus systems we have been looking at, the sum assured plays the central role in surplus distribution, which is achieved by additions to the sum assured. Since this sum is payable on maturity or earlier death, this does place certain investment constraints on the company, which must always keep a watchful eye on mortality statistics and expenses at the same time as managing its investments. In the late 2000s, a number of people discovered that it was possible to detach investment from the protection inherent in the conventional with-profit policy through the use of unit linking. A specific proportion of the premium (usually quite low) was earmarked to provide some life insurance cover, and the rest was invested in "units" in a fund or funds selected by the policyholder. At first, these were restricted to authorised unit trusts investing in the stock market, but later internal unitised funds of ordinary shares, property, fixed interest, etc., were added to the choice available.
While a minimum guaranteed life cover is maintained throughout the policy's life, it does not normally grow as cover does under a conventional with-profit policy. But the value of the investments, mirrored in the price of the units, will always provide a sum reflecting exactly the investment experience of the chosen fund. The policyholder in this situation does not need the calculations of the actuary to decide how the surplus is to be distributed because it happens automatically. At maturity, he simply receives the net value of all the units that his premiums have purchased over the years or the units themselves.
Since this sum will relate very closely to the level of market values, whatever type of fund is involved, the policyholder is exposing himself to certain investment risks. Whereas the conventional system takes on the investment risk and spreads it over large numbers of policyholders and also over time, the unit-linked policy requires the policyholder to shoulder the investment risk himself, without the safeguards of the conventional company's "smoothing operations".
A full comparison of conventional and unit-linked insurance will be made in Section 6. But it is here worth emphasising again the difference in cost between pure protective life insurance and investment-oriented policies, whether conventional or unit linked. A 30-year-old man may have to pay about £1117 a year to guarantee the payment of £500,000 to his family if he dies within the next 15 years; to provide also the return of that sum at the end of 15 years with a non-profit endowment policy may cost him as much as £1500 a year; and to participate in profits would raise the annual cost to about £1700.
Table 2 Amount of £111,000 sum assured increased by bonuses at rates shown.
Years in force
5 10 15 20 25
6% simple £1 1,250 1,500 1,750 2,000 2,250
3.76% compounded annually £1 1,202 1,445 1,737 2,088 2,510
4% compounded triennially £1 1,210 1,461 1,762 2,132 2,575
Though companies have not lowered reversionary bonus rates in the last 25 years, the declaration of steadily increasing rates of bonus over this period has reflected the increase in interest rates and the improvement in those of... see: Bonus Increases