Review Life Cover

While the switching facility offers scope, it is a mistake to invest on the assumption that you will use it and then neglect to do so. If you do not want to make regular reviews of your investment and take the appropriate switching action, then it is better to plan for this at the outset. Whereas the switching investor might put all his money into a gilt fund with the intention of switching it into the equity fund when conditions changed, the inactive investor would be ill advised to put all his money into a gilt, property or equity fund and would probably be better off either putting some money in each or putting the larger proportion in the managed fund.

Because they are life insurance policies, investment bonds also have useful applications that other investments do not. For example, they may be written under trust, as policies under the Married Women’s Property Act, possibly to provide for a child’s education. A different group of single-premium policies is based on traditional policies. They are aimed at generating the highest possible guaranteed net return, both over short periods of two to five years and for longer terms up to 15 years. There are two types, those aimed at producing a guaranteed capital sum at the end of the term and those aimed at generating a high net income over the period with return of the original capital at the end.

Partly because of their ability to offset their expenses against taxable income, life insurance companies can often generate a very attractive return on such contracts. For example, in late 1978 when long-term interest rates were about 13%, several companies were offering net returns of up to 9% p.a. over periods from one to three years. The growth bond is based either on a non-profit endow­ment policy or on a deferred annuity. In both cases, the gain on the original investment is subject to tax at the higher income tax rates but in the case of the deferred annuity basic-rate income tax is also chargeable on the gain.

Some policies operate on a yet different basis. Instead of making an annual charge the company keeps the income from the investments of the fund. In return, it allocates a higher proportion of the premium to units. Thus it may say that it will invest 115% or 130% of your premium in units and keep all the income generated by the investments (if you are puzzled as to how the company can invest more than it takes from you each month, the answer is that it does not but it guarantees to pay you at maturity as if it had). There are two reasons why you should think very carefully before taking out such a policy. One is that the lack of income to reinvest, as mentioned earlier, is a severe handicap to investment growth. The other is that the system creates a conflict of interest between the policy­holder and the company. The policyholder wants the value of the units to grow while the company may be tempted to invest for maximum income, with damaging effects on investment growth.

This suggestion of careful consideration might with justification be extended to any unit-linked policy you are offered by a salesman who knocks on your door. Often, only one plan will be offered, and this may not always be good value for money. From a qualified insurance broker you will almost certainly have the choice of several policies offering good value for money.

Like conventional companies, unit-linked offices do not guarantee the surrender values of their policies. There is often a guarantee that the minimum sum to be paid at maturity will be the sum assured, but this itself may be as low as 75 % of the premiums payable throughout the policy, so that it is not exactly a generous guarantee. The surrender value and paid-up value of unit -linked policy are usually the same. Since the company builds its plans on the expectation that they will run to maturity, it usually exacts some penalty on surrender or termination of premium payments.

The most important decision in life insurance is to buy the right type for your needs. Broadly speaking, at the younger ages when family responsibilities are heavy (from marriage through to when children become independent) protection is more important, whereas in the later stages of working life investment becomes crucial.

It’s been said at the start that there are often hundreds of policies of one type available. Life insurance companies change their premium rates for particular policies from time to time in response to market conditions or internal considerations. Furthermore, it is impossible to cover all the minor variations in policy conditions that may, for one individual, be extremely important. And though it is only current rates of premium per sum assured (together with any specific differences in conditions of the contract) which determine the relative value for money of protective life insurance, this is not true of investment oriented policies. The best value here will not be found by comparing premium rates because the ultimate maturity value delivered to the policyholder will depend mainly on investment experience, the result of the investment decisions of the life company over a period of many years, and this is not easy to predict.

As regards caring life insurance, it is in any case more important to choose the right type of policy than the cheapest individual policy obtainable, since the difference in actual cost will not be very large. In choosing an investment oriented contract it is more important to pick up the right one for the individual, but in general this is beyond the ability of the individual and requires the assistance of an insurance broker or other adviser. It is possible, given the necessary background knowledge, for the individual to decide such matters himself, but there are good arguments against doing so.

The advice available to individuals on life insurance can be of variable quality. In some cases it is less professional and objective than it ought to be, largely for historical reasons concerning the structure and development of the life insurance business.