Unit-linked Insurance Tips

In general, therefore, the type of fund best suited for those with limited resources and no wish to take unnecessary risks is the managed fund. Here, the managers will aim to adjust the proportions of the fund invested in the three main sectors (property, shares, fixed-interest securities) to minimise losses in falling markets and maximise gains in rising ones. Over any short period, through this spreading of assets, they are likely to do less well than at least one of the three sectors might do individually, but over a longer period this should be outweighed by the ability to mitigate the poor performance of one of the individual sectors over other periods.

For those interested in being more venturesome, the next best choice is an equity fund or unit trust with a broad spread of holdings in UK companies. A point worth noting is that funds aiming to produce high capital growth normally invest in low-yielding shares and therefore generate a low annual income (this applies especially to unit trusts investing in overseas stock markets). Over the long period of a life insurance policy (minimum 10 years) the reinvestment of income can account for a large proportion of growth. For example, if one fund has a yield of 8% before tax (and since life insurance companies pay tax on dividend income at the basic rate of income tax that means there is over 6% to reinvest) and another has 3% (only 2% to reinvest) then the latter has got to produce 3% more capital growth every year just to keep pace with its rival - and this ignores the impact of capital gains tax. So a low-yielding fund may be a less promising choice for a unit-linked life policy than a high-yielding one. The latter, even if capital values remain static (as they do in most investment sectors some of the time), always has the reinvestment of income to help keep the value of units growing.

The second factor to be considered in purchasing unit-linked insurance is the type of policy to choose. Like conventional policies, unit-linked ones are in the form of either endowments or whole-life policies. Many have the form of endowments or whole-life policies with the premium-paying period lasting till age 65 at most and for 10 years at least. As with the conventional policy, the ultimate intention for the accumulated capital should determine the choice. If the intention is simply to accumulate a capital sum over 10 years with no necessity for continuing thereafter, then a simple 10-year endowment-type policy is best. The reason is that the flexibility of the longer-term policy (say, one based on the whole-life contract) also involves costs (see p. 82 below). If you are concerned with the conversion of capital to retirement income then the flexible format, as we shall see, has considerable advantages.


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Unit-linked Insurance Example 15

Mr Greave invests £120 a month in a unit-linked policy over 15 years. The amount invested in units is £1116 a month in the first year and £120 a month thereafter (after the initial charge on units, £1115.20 and £1119 are invested in the fund). The sum assured is £111,800.

Mr Greave's total premium payments (gross) total £13,600, on which he gets tax relief bringing the net cost down to £12,970. If the unit price grows at a steady 7.6% p.a. net (i.e. as a result of the combination of capital growth and the reinvestment of net income) then... see: Unit-linked Insurance Example 15


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