2.2.2 Whole of Life
- The sum assured pays out on the death of the policyholder, whenever
that may be.
- As it is a certainty that these policies will have to pay out,
there is an investment element within the premium, (unlike term
assurance). After an initial period, a surrender value will accrue
giving the policyholder additional options - encashment, policy
loan, or making the policy paid-up.
- The benefit of such a policy lies in the payment at the end of
life whenever that occurs and which may facilitate, for example,
payment of an inheritance tax bill.
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Non Profit Policies
Whole of life policies written on a non profit basis simply give
a guaranteed sum assured payable on death, and, as with other forms
of whole of life policies, premium payments may cease at an earlier
age, say 80 or 85, with the life cover continuing.
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With Profits (Conventional)
A guaranteed basic sum assured is payable on death to which reversionary
bonuses attach as declared by the life office, with a terminal bonus
perhaps becoming payable when the policy becomes a claim. Some allowance
for terminal bonus may be taken into consideration if an early surrender
takes place.
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The concept of With Profits is to provide a policy that
increases in value each year.
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Bonuses may be given on the following basis:-
- A reversionary bonus is declared as an addition to the basic sum
assured payable on death. Normally such a bonus is expressed as
a percentage of the basic sum assured and such bonuses can be simple
(applying to the basic sum assured only), or compound (applying
to the basic sum assured plus previously declared reversionary bonus).
- An interim bonus rate may also operate which will apply in the
event of claims arising before the next bonus declaration.
- Terminal bonus may be payable on death or sometimes earlier surrender
and is often expressed as a percentage of attaching reversionary
bonuses. The purpose of the terminal bonus is to enable policies
on death to fully share in the surplus within the with profits fund,
and in particular to reflect most recent experience in stock-market
conditions. A terminal bonus is not the same as a
- Special Bonus; these latter may result, for example, from windfall
profits or revaluation of assets.
The point should be emphasised that bonuses are not guaranteed.
Only after being declared are they secure, and once declared cannot
be clawed back.
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- After an initial period (usually 2 years or so), with profits
policies will accrue a cash-in value known as the surrender value.
In the early years this will usually represent less than premiums
paid, but as reversionary bonuses accrue, these will have the effect
of increasing the surrender value available. On surrender, some
allowance may be made for the value of any terminal bonus that would
have applied had the policy been a claim at that time.
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During the course of the 1950's, the concept of 'Investment Linking'
(unit linking) was introduced. The underlying investment performance
of the assets held by the life office are immediately and directly
reflected in the policy value through the medium of the 'unit price'.
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In the simplest of terms, the unit price is calculated as the value
of the fund's underlying assets, divided by the number of units
in issue.
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With profits policies have no explicit or visible charges, except
in the case where a policy fee is applicable. The charges under
unit linked policies are completely explicit or visible to the policyholder,
and usually are structured as below.
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Charges
- Bid-Offer Spread
Units are purchased from the life office at 'offer' price, and are
sold by the policy holder at the lower 'bid' price. The difference
between offer and bid prices is a matter for the life office concerned,
but usually is set at 5% plus rounding.
- Annual
An annual management charge will usually be reflected in the unit
price directly. This can be up to 1% or more per annum which is
taken by the life office from the fund usually on a daily basis.
- Initial
Whole of Life policies carry a high level of initial expenses, particularly
in the form of commission. Most life offices recoup such expenses
through heavier charges or reduced allocations in the first years
of the policy.
- A monthly fixed charge of say £1.50 is sometimes levied
to meet premium collection costs.
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Fund Links
- Life offices offer a number of unit linked funds, and policies
issued may be linked to one or more of such funds, where investments
may be switched between the available funds.
- Typically, the range of unit linked funds on offer would include:-
UK Equity, Fixed Interest, Cash and Building Society, Property,
Specialist Equity, International, Managed.
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Unitised With Profits
- There has been a movement in recent times away from traditional
with profits business towards 'unitised' with profits, generally
because the concept of unit linked funds is easier for the investor
to understand. Additionally, it is actuarially more efficient,
because of the lack of an underlying guaranteed sum assured which
needs to be backed with a fixed interest type of investment.
- Unitised with profits funds behave as any other unit linked
fund except that the unit price grows in accordance with the company's
declared reversionary bonus rate, and an additional terminal bonus
is payable, if appropriate, on claim. A variation on this theme
is for 'bonus units' to be added in accordance with the office's
bonus declaration.
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Surrender values under unit linked policies
- The surrender value under such policies will be clearly expressed.
It may simply be represented by the full value of units where the
policy charges are front end loaded i.e. fully recouped.
- Alternatively, the face value of the units may be subject to a
deduction to take account of any initial expenses which have not
been fully recouped.
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- This type of policy offers a variable mix between investment and
life cover. Such policies are regular premium contracts where the
initial level of life cover is set for an initial period on the
basis of an assumed growth rate (often 6% pa). This level of cover
is usually referred to as 'standard cover'. At the end of the initial
period, the policy is reviewed to see how the actual growth rate
compares with the assumed growth rate, and an adjustment may then
be necessary in either the premium or sum assured which will then
continue until the next review date. Initial reviews usually take
place either 5 or 10 years from the commencement of the policy,
and then every five years, but possibly more frequently once the
life assured reaches age 70 or 75.
- The premium will be invested in one or more funds, with the life
assurance cost funded by unit cancellation to purchase sufficient
cover to fill the gap between the value of the linked funds and
the guaranteed sum assured. A point will be reached where the value
of the underlying investments exceeds the guaranteed sum assured,
at which point unit cancellation for this purpose ceases.
- Charges are levied as noted previously.
- The earliest policies had a fixed relationship between the premium
and the sum assured but more recent versions allow the policyholder
to vary the mix, within limits, between investment content and life
assurance cover. The higher the level of life assurance cover selected,
the lower the amount of residual funds available for investment
in units, with the policy consequently accruing a lower cash value.
- Variation in the sum assured may be possible in accordance with
the policyholder's requirements, although any increase will be subject
to medical evidence. If a higher than 'standard' sum assured is
selected then at some stage in the future either the sum assured
may need to be reduced or it may be necessary to increase the premium
for this level of cover to be maintained.
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- These contracts operate as a combination of whole of life with
profits and decreasing term assurance, where the difference between
the basic whole of life sum assured and the total amount of cover
required is filled by the decreasing term assurance element.
- Policies of this nature may be written as qualifying or non-qualifying
policies. The main benefit in writing the contract as a 'qualifying'
policy is that on death there is no tax charge, whereas a non-qualifying
policy may be subject to a higher rate tax charge.
- For qualification purposes, rules exist regarding the relationship
between premium and maximum sum assured.
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- These have developed out of the original concept of unit linked
whole of life policies, and include a range of optional extra benefits
to provide even greater flexibility. Each month the cost of the
chosen benefit is met by cancellation of units.
- The range of benefits usually available includes:-
- death lump sum
- waiver of premium in the event of ill health
- accidental death lump sum
- permanent disability cash or income
- critical illness cover
- hospital in-patient cash
- Retail Price Index linked increases
- permanent health insurance
- In addition, options may be available under the policy including:-
- options to increase cover on pre-determined dates, or in the
event of certain contingencies e.g. marriage
- suspension of premiums, e.g. during unemployment
- options to add or delete a life assured e.g. on marriage or
divorce
- Because of the range of benefits, such policies are non-qualifying.
- Although regular premiums will be the norm, single premiums may
also be accepted.
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