Mr French is aged 30 and invests £120 a month in a unit-linked policy over 10 years. After life cover and costs, £1118.50 is invested in units of which the 6% initial charge takes £111.
£1117.50 per month invested over
10 years = £12,100
Net cost of premiums = £120 -17.6%
= £1116.50 per month over 10 years = £111,980
Effectively, therefore, he is getting a £111-a-month rebate from the Chancellor of the Exchequer towards his savings.
In practice, most policies incorporate a more complicated charges structure (see p. 80 below). However charges are levied, the final value of the policy at maturity is determined by the growth in the value of the units. This depends partly on the skill of the investment managers but is determined to a larger extent by trends in the economy and the financial markets. Estimates of growth in unit value are always used in estimating maturity values for unit-linked insurance; it is important to remember that, just as reversionary bonus rates are never guaranteed, so neither are estimated growth rates. No one knows what the future holds.
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... see: Fund Division