Review Life Insurance Quote

The unit-linked life insurance plan offers the only real hope of keeping pace with inflation, but the big disadvantage is that the “unitised” pension starts at about half to two thirds the level of the level pension (because the latter is based on fixed-interest yields which are that much higher than the yields on shares or property).

A middle course is to take half the benefits as a level annuity and keep the rest in units, which may be the best choice of all. Another option now becoming more widely available with both with-profit and unit-linked schemes is to take a pension at a level lower than the annuity rate but higher than that of the “unitised” pension. The company anticipates a rate of growth (capital and interest combined) and builds this into its assumptions, thus allowing a higher rate of pension. Say it assumes a 4% growth rate. Then if the units grow at 10% the plan holder is credited with only 6%, the company keeping the rest; and if their value drops by 5% then this is further reduced to a fall of 9%.

Another alternative is to take a pension increasing by a fixed percentage each year. Companies will quote different rates of initial pension based on the “escalation” rate. The higher the rate proposed, the lower the initial pension will be, and so this alternative suffers the same disadvantage as the pure “unitised” pension.

Yet another option is to make the pension payable during the policyholder’s wife’s life as well as his own. Since women usually live longer than men, this will usually mean a reduction in the annual pension, the exact amount of reduction depending on the wife’s age relative to her husband’s.

Changing investment conditions have led to the popu­larity in recent years of with-profit single premium plans. Here the individual does not commit himself to anyone company or plan but simply “shops around” each year for the one with the most investment appeal. Most companies allow single-premium plans, but in some cases the minimum contribution is as high as £1,000.

Charges are taken in three basic forms. First there is the deduction from the premium to service the cost of life assurance cover and the office’s expenses. This will vary according to age because of the varying cost of the life cover. The amount left after this deduction is the amount allocated to units. It is usually expressed as a percentage - a contract may specify that 95% of each premium is allocated to units (so that of a £10 premium, 50p is being deducted). Then there is the initial charge on the units allocated. In most cases this is 5%, but it may in some cases be lower. Then there is an annual charge on the value of the units attributable to the policyholder. This may be as little as 0.5% or as much as 1.5% p.a.

In combination, these different charges can produce quite different effects. For example, one policy may allocate 82.5% of the premium to units in the first year and 100% thereafter, with an initial charge on units of 3% % and an annual charge of 0.5%. Another may allocate 95% of premiums to units in the first five years and 100% thereafter, with an initial charge of 5% and a yearly charge of 3.5%. Assuming the same 7.5% p.a. rate of growth in investment values, the former would produce a £3,000 maturity value after 15 years at £10 a month while the latter would produce only £2,700. As far as the life insurance policyholder is concerned, the lower the overall level of charges, the better.

A special type of unit, often called a capital unit, may be allocated for the first one, two or three years of a policy. A note tucked away in the literature may tell you that these units embody an extra management charge of 2% or 3%. Beware. This charge is not a once-for-all addition to the initial charge on units. It is an annual charge calculated on the value of the units for each year the policy is in force.

A company might pay £4% compounded annually plus £5% on the bonuses attaching. On our £3,000 policy this would mean that after Year 1 the sum assured would be around £3,126; after the second year it would be £3,263.60, and so on.

It does not stop here. Since the 1960s many life insurance companies have introduced yet another category, the terminal bonus, also sometimes called a capital bonus. This is usually paid as an addition to reversionary bonuses and is declared and payable only at maturity or death. Its original purpose was to allocate capital gains over the existence of the life insurance policy, and since market prices can change substantially, it was also held that terminal bonus rates would alter to take account of these movements. In practice, however, companies using terminal bonuses have split into two camps, those that do adjust them according to market experience (some of these, for example, raised their terminal bonus rates substantially in 1972 when the stock market was high and lowered them sharply in 1974 when it was low) and those that have chosen to maintain terminal bonus rates at a specified and unchanging level. Clearly in comparing policies with reference to future values it is necessary to. You need to know which attitude a life insurance company adopts.

Terminal bonuses may be declared in two ways. Some companies declare them as a percentage of the sum assured for each year or number of years a life insurance policy has been in force, for example, 1% of the sum assured for each policy year. Others declare them as a percentage of the total bonuses already allocated to the life insurance policy, for example, 20% of all bonuses attaching.

With all these different bonuses and variations, it is easy to get confused. But as far as the individual is concerned the main thing to realize is that the different systems are all aimed at the same thing, distributing the surplus achieved by the life insurance company according to the success (or otherwise) of its investment management.