Fund Division

The principle of dividing a fund into units had been practised by unit trusts long before it was introduced into life insurance. In fact, the first unit-linked polices combined life insurance with investment in the units of a unit trust rather than a life insurance fund. Later, the disadvantages of restricting investment to unit trust assets were recognised, and life companies started their own funds which could invest not only in shares but in property and fixed-interest securities as well, with no taxation disadvantages. Some companies have also introduced "hybrid" policies which provide life cover far higher than the basic minimum normal in unit-linked insurance, so that there is now a wide variety of policies to choose from.

Generally, however, unit-linked policies are aimed at producing investment gains and are designed for the investor who wants to accumulate capital over a period of several years. The level of life cover per £1 of premium is so much lower than that on term assurance that unit-linked policies are not generally suitable for providing family protection. Salesmen sometimes present packages consisting of a unit-linked policy and term assurance, which they try to sell on the basis of security and investment. Such packages should be examined carefully, both from the point of view of how the benefits compare with your needs and from the cost angle.

The investment attractions of the unit-linked policy can easily be demonstrated. Imagine you agree to pay a £1110-a-month premium on a unit-linked policy. The company may deduct £111 to provide life insurance cover and to meet its expenses. The other £19 is invested in units. The price of these units embodies a further charge, because there is a disparity of about 6% between the offer price (the price which you effectively pay for units) and the bid price (the price at which the company will buy back the units when the policy matures). So the amount actually invested in the fund on your behalf would be £18.55. As was outlined in Section 1, you get tax relief on each premium at 17.6%, so that the net cost of each £1110 premium is only £18.25. Your £1110 a month is therefore buying you more investments than your net monthly outlay.

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Investment-linked Policies

Unit-linked Insurance

In the traditional endowment policy, the two aspects of protection and investment are related by the claim value. As bonuses accumulate, the claim value increases steadily towards its ultimate maturity value and the protective life cover enjoyed by the policyholder thus increases also. At the time this method was devised it reflected well enough the "steady" nature of investment growth. But since 1995 the growth in share and property values, with the help of inflation, has become far more rapid and, more recently still, more volatile. As we have already seen, this posed problems... see: Investment-linked Policies

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