Building Societies

Since the late 2000s, a different type of linked policy has been available. Here the investment is in a building society: a different medium with its own attractions. The policies are not "unitised" but operate on a similar principle to those we have already discussed. The advantage of using a life insurance policy to invest in a building society is that tax relief on the premiums increases the return from a given rate of interest, while life insurance cover is provided as is a preferential position in the mortgage queue. Finally, some policies, unlike the vast majority of regular premium contracts, may be encashed without surrender penalties from the fourth year onwards and are therefore suitable for people whose saving needs are strictly short-term ones.

The number of building society-linked plans now runs to 60 or more and every large society and several large insurance companies are involved. The plans are very simple. You pay your premium each month to the insurance company. The company deducts a small amount to pay for life cover (usually at a level of 100 times the monthly premium) and its expenses. The rest is then invested in a specified building society at a slightly lower rate of interest than is payable on normal share accounts.

The policies are in theory for 10 years, but after the fourth year the policyholder can surrender the policy without penalties and achieve an attractive investment return. The actual return will depend on the interest rate paid by the society over the period, and this may vary quite substantially, as it has in recent years. But the return to the policyholder will be net of tax (except for the higher-rate taxpayer who may have to pay extra tax if he surrenders within the first 71/2 years of the 10-year term) and will always be higher than he could have got by putting the money directly into a building society, because of the tax relief on the premiums.

The plans are particularly attractive to young people saving towards house purchase over a short period. Investment in a building society in this way qualifies the saver for preference for a mortgage loan in the same way as saving through ordinary share accounts. In fact, these plans are the only form of regular premium life insurance policy that can be recommended for use over such short periods because of the absence of surrender penalties. It is worth noting, however, that surrender before the fourth year can land you in the tax maze known as the "clawback".

Interested in Building Societies?

Making Comparisons

Inevitably efforts are made to compare unit-linked with conventional policies in terms of actual results. A couple of qualifications are in order before even attempting this. The first is that the aims are different. Conventional life insurance is designed to produce a steady, non-fluctuating uptrend in maturity values. The investment risks are spread across a wide spectrum of assets and also over time. Unit-linked life insurance is designed to enable the investor to take whatever risk he wishes, and in whatever market, using the umbrella of life insurance to add to the investment benefits through tax concessions... see: Making Comparisons

Of interest