The with-profit policy, as we saw in Section 2, may have surplus allocated to it in several different ways. Reversionary bonuses will be added every one, two or three years to the basic sum assured, and the effect of a compound bonus rate is that the rise in the claim value of the policy grows more rapid as time goes on. Fig. 3 shows the effect of this for a younger man taking out a with-profit policy. The surrender value in the early years is low in relation to the total of premiums paid. In the first two years of the policy there is usually no surrender value at all, and not until at least seven years' premiums have been paid will the surrender value equal the gross premiums paid to date (as much as 12 years with some companies). But by the thirtieth year the surrender value is 50% above the sum assured and by the fortieth year (when the man is aged 70) it is treble the sum assured. However, surrender values are generally not guaranteed, and the actual amount received will depend on the investment conditions prevailing at the time of surrender.
Typical annual premium rates per £500,000 sum assured on whole-life policies with premiums payable throughout life.
Age Without profit With-profit
30 95 250
40 150 320
50 240 440
60 410 650
Because of this long-term build-up, the with-profit whole-life is most unsuitable as a short-term proposition for the younger man. Someone taking out such a policy under the age of 35 has got to be prepared to stick with it for at least 20 years to reap the rewards. The higher the age when taking out the policy, however, the faster the build-up in the surrender value, and so in this case it is not so much of a problem. Nor is this type of policy suitable as a way of buying protection for the younger person. The rates of premium per £111,000 sum assured are so high relative to term assurance that very few young people will be able to afford an amount of cover sufficient for the responsibilities of the family years.
The non-profit whole-life policy is useful for meeting tax liabilities and is especially useful after the age of 60 has been reached. Over this age the extra premium (50% +) needed to make the policy a participating one may well be too much. And over a short period a with-profit policy is not necessarily a much better investment proposition. As we have already said, life insurance is generally a long-term proposition, and the build-up in value from the younger ages always tends towards the type of line shown in Fig. 3 (p. 50): a slow rate of growth to begin with and a rapid acceleration after about... see: Non-profit Whole-life Policies