Like conventional companies, unit-linked offices do not guarantee the surrender values of their policies. There is often a guarantee that the minimum sum to be paid at maturity will be the sum assured, but this itself may be as low as 76% of the premiums payable throughout the policy, so that it is not exactly a generous guarantee.
The surrender value and paid-up value of unit-linked policy are usually the same. Since the company builds its plans on the expectation that they will run to maturity, it usually exacts some penalty on surrender or termination of premium payments. A common method is for a percentage of one year's premiums to be deducted from the bid value of units according to the number of premiums paid to date. Thus a policy may require 60% of one year's premiums to be deducted if it is surrendered in the first five years, with the proportion reducing to 0 by the tenth year. The longer the term of the policy, the longer the period during which a surrender penalty will be exacted.
The surrender value is usually the value at bid price of the units accumulated (less the appropriate charge). The bid price is usually 5-7% below the offer price at which units are sold. However, some companies also make a deduction from the proceeds for capital gains tax liabilities in the fund. The reason is that the company itself is liable to capital gains tax at 30% on any investment profits realised. It has to pay only when it actually sells the investments, and in most cases companies have unrealised profits on their holdings.
The potential liability to tax does have to be shared out among policyholders, however. A deduction of 10% of the total gain achieved on the policyholder's investment is one way of doing this. In other cases, the tax liability is "built in" to the unit price (i.e. the bid price is slightly lower than it would otherwise be) according to a more sophisticated formula.
Some policies operate on a yet different basis. Instead of making an annual charge the company keeps the income from the investments of the fund. In return, it allocates a higher proportion of the premium to units.
Thus it may say that it will invest 116% or 130% of your premium in units and keep all the income generated by the investments (if you are puzzled as to how the company can invest more than it takes from you each month, the answer is that it does not but it guarantees to pay you at maturity as if it had). There are two reasons why you should think very carefully before taking... see: Higher Premiums